Background on “myRA” – A New Federal Retirement Savings Program

For those who chose to listen to or watch President Obama’s State of the Union Speech last month, you may recall his mentioning of the new “myRA” retirement savings program.  We thought it might be helpful to expound on what this program is, and how it relates to the array of other retirement savings options you already have--including, of course, traditional and Roth IRAs, 401(k) and/or 403(b) plans, etc. While many of you will not meet the eligibility requirements for this new program, for those that do, you may find that myRA may not be your optimal solution as you assess the myriad tax-deferred vehicles available.  We hope this article helps you to evaluate whether you (or someone you are close to) should consider this instead of, or in conjunction with, other retirement savings vehicles.

Having set up our own 401(k), Pauley Financial has partnered with a number of our clients to ensure they are optimizing their 401(k) opportunity as appropriate.  As part of the upcoming tax preparation meetings, we strive to help all of our clients think through their retirement savings options, including Simplified Employee Pensions (SEPs), Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and Section 403(b)/401(k) Plans, to name a few. 

“myRA” Quick Reference Bullet Points:

1.) “myRA” accounts are aimed at workers whose employers do not offer traditional retirement accounts like 401(k)s.

2.) The accounts would function like a Roth IRA and have government backing like a savings bond.  Contributions are taxed before they go into the account just like the rest of a person's salary, but the money will come out tax-free. 

3.) There will be an initial pilot program for companies that agree to enroll by the end of this year. Workers can invest if they make less than $191,000 a year for married couples - $129,000 for singles.

4.) Businesses will not administer or run the accounts. They will simply offer them to their employees if they decide to participate.

5.) There will not be a tax penalty if the investments are withdrawn. While this provides flexibility, it is not a great recipe for building long-term savings.

6.) Initial investments could begin at $25, and subsequent investments could be as low as $5. The idea is to have investments added through payroll deductions.

7.) Accounts can be taken by the employee from one job to the next, and they can be rolled into an Individual Retirement Account at any time.

8.) The accounts would have the same variable interest rate return as the Thrift Savings Plan Government Securities Investment Fund accounts that federal employees enroll in.

9.) Once someone’s account grows to $15,000, the “myRA” must be rolled over into a private-sector Roth IRA.

As mentioned above, these new accounts will be offered to workers who currently don't have access to any kind of retirement program through their employers.  Remarkably, this underserved population is actually about half of all workers, mostly those who work for small companies which have trouble affording the cost of creating and administering a 401(k) plan.  The idea is that a “myRA” would be so easy to install and implement (employers don't have to administer the invested assets), and cost so little (virtually nothing), that all of these smaller companies would immediately want to give their employees this savings option.

So the first thing to understand is that people who already have a retirement plan at work, or who earn more than the thresholds, shouldn't give the “myRA” option a second thought.

Nor, frankly, should these people want to shift over to this option.  “myRA” functions like a Roth IRA, which means that contributions are taxed before they go into the account just like the rest of a person's salary, but the money will come out tax-free.  However, the “myRA” is not really an investment account.  Any funds that are contributed to a “myRA” account earns interest from the federal government at the same rate that federal employees earn through the Thrift Savings Plan Government Securities Investment Fund--which is another way of saying that the money will be invested in government bonds.

Another issue is the employer match.  Many workers who have a traditional 401(k) account get some of their contributions matched by their company, which effectively boosts their earnings.  “myRA” accounts will get no such match.

The Obama Administration clearly understands the difference between saving in a government bond account and actual investing; there is a provision that whenever a “myRA” account reaches $15,000, it has to be rolled into a Roth IRA, where the money can be deployed in stocks, bonds or anywhere else the account holder chooses.  The program seems to be designed to encourage younger workers to start saving much earlier than they currently do.  Statistics show that the median retirement account for American workers age 25-32 is just $12,000, and 37% have less than $5,000.