The Treasury has unveiled details of of the new myRA retirement savings plan announced by President Obama in his State of the Union address on Jan. 28. The accounts, which Treasury calls ‘a simple, safe and affordable way to start saving,’ won’t be available until later this year, but we can start examining the details now:
- MyRAs will be Roth IRA accounts, initially offered through employers, and will be equivalent to savings bonds – backed by the full faith and credit of the United States.
- Savers will be able to open an account with as a little as $25 and contribute $5 or more every payday.
- MyRAs will be available to anyone who has an annual income of less than $129,000 a year for individuals and $191,00 a year for couples.
- MyRAs are designed for savers who don’t have access to an employer-sponsored retirment savings plan, but the Treasury adds that people who ‘are looking to supplement a current plan’ can also participate. So that means myRAs are open to everyone who qualifies for a Roth IRA and works at a participating employer.
- Annual contributions will be capped at the Roth IRA limits: $5,500 per year (or $6,500 if you’re 50 or older).
MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees. This fund had a return of 1.89% in 2013, but that will change with market conditions.
- Once a saver’s myRA reaches $15,000, or after 30 years, the balance will be rolled over to a private-sector retirement account. The Treasury hasn’t yet determined how this will be handled.
- Contributions can be withdrawn tax free at anytime; earnings generally can be withdrawn tax free after age 59½.
Some thoughts. I can’t criticize any plan that will encourage people to save. The myRA proposal emphasizes safety and is built into an attractive Roth IRA package, offering tax-free money in retirement. It is simple, has zero fees and is extremely low risk, because balances can never decline. And use of payroll deductions will encourage ‘auto-saving,’ which is crucial to building wealth.
As an opening step, fine. But let’s say this is the sole retirement savings plan of a person in her mid 20s. She is investing in small amounts, earning less than 2%, and eventually building a nest egg of $15,000. Wouldn’t that person – who is young and can afford to take risk – do better by opening a Roth IRA and investing in a low-cost stock mutual fund?
This person needs to strip off the training wheels and really start saving for retirement, because $15,000 just won’t cut it. But if a myRA account gets that process rolling, and the $15,000 is smartly invested after it is rolled over, it is a good beginning.
I think the Treasury needs to set up protections for people who reach the $15,000 limit, because I fear these folks could fall prey to investment predators – bankers pushing load-heavy mutual funds, insurance agents peddling high-cost annuities, day-trading ‘training’ schools, and on and on.
How can the Treasury move these myRA ‘graduates’ into customer-friendly investment houses like Vanguard and Fidelity? This will be a huge issue.