Jan 30, 2014

IRA, Roth IRA, MyRA, What’s a MyRA?

Patrick Ryan

On January 28th, in his fifth State of the Union Address, President Obama announced the MyRA (rhymes with IRA).  In his own words, “It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in.”

While some additional details are still to be released, the MyRA is essentially a tax deferred retirement savings vehicle, styled after a Roth IRA. That means that the contributions are paid with after-tax dollars, but the earnings can later be withdrawn tax-free during your retirement.

The MyRA will be a government sponsored savings account, established by the Treasury Department. The investments will be very similar to savings bonds, which are backed by the full faith and credit of the United States Government (hence the “no risk”). It is aimed at individuals who don’t have an employer sponsored 401(k) plan to save for retirement. The MyRA will be available to individuals with annual earnings up to $129,000, and to couples earning up to $191,000, and can be set up with a contribution as low as $25. You can then have payroll deductions as low as $5 automatically contributed to your account. The Obama Administration previously established a program that would allow payroll deductions to purchase Treasury Securities, so this seems to be an extension on that program.

The MyRA is aimed at those that would not otherwise have the option to invest in a tax-advantaged savings plan. It is not intended to be a large investment vehicle. Once your account reaches a maximum balance of $15,000, you will need to move it over to a privately managed (like Fidelity or Vanguard) Roth IRA.

Previously, low balance accounts were too administratively difficult for companies to manage, or the associated fees too large to justify the modest balances. The MyRA is aimed at solving this problem.

While the President “guarantee[d] a decent return” the actual return will be the same as the variable rate offered to Federal employees through the Thrift Savings Plan, which had a 1.47% return in 2012, compared to the S&P Index which had a 16% return in 2012. However, the principal contributions are guaranteed, which would have left investors much better off than the 37% loss the S&P faced in 2008. With low risk comes low reward, but the MyRA is a great way to encourage investors to start saving for retirement. Another benefit is that an individual can keep the same account, even if they switch jobs.

After all, the goal is to get more people saving for retirement, which seems to be something both sides can agree on.

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