If you watched the recent State of the Union Address by President Obama, or follow finance related media, you are aware of the introduction of the new MyRA – My Retirement Account. As noted by President Obama, the program’s goal is to encourage millions of Americans to build savings that can supplement Social Security benefits.
Considering that Americans already have access to a myriad of savings and retirement plans including 401(k) and 403(b)s; traditional and Roth IRAs, Rollover IRAs, health savings accounts, and 529 college savings plans, how is the MyRA different and what does it add to the mix?
Essentially, the MyRA is a type of Roth IRA. It will allow after-tax dollars to grow tax-free until retirement. Geared toward lower-income Americans, one objective is to encourage people to get in the habit of saving. Supporting that idea, this new plan will allow people to open a MyRA with as little as $25, and to contribute as little as $5 in regular payroll deductions. As many have noted, private financial services companies could offer such small accounts, however, they don’t because it’s not profitable for them to do so.
What are the key overarching outlines of the plan in addition to the $25 required to open an account and the $5 minimum requirement for payroll deductions? The MyRA is available only to those who don’t have a retirement plan through their employer, there are no matching contributions, it is only available to whose household income is less than $191,000 each year, and once the account balance hits $15,000 (or earlier if desired), it must be rolled into a private Roth IRA.
One of the things that caught my attention was the proclamation by President Obama that the investment returns will be the same as those enjoyed by federal workers who invest in the Government Securities Investment Fund (G Fund) and offered via the Thrift Savings Plan (TSP). As noted on the TSP site, the G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a non-marketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money.
As a federal employee that contributes to TSP, I am aware of the low fee – 0.027% – associated not only with this particular fund, but all of the funds available in the plan. Interestingly, Jack Lew, Secretary of the Treasury, noted that unlike federal workers who invest in the G Fund, MyRA customers will pay no fees. The only thing better than ultra-low fees are no fees!
I don’t believe anyone is under the impression that this new program alone will raise our dismal savings rate or solve the retirement crisis. However, based on my initial understanding of the program, I do believe anything that encourages Americans to save more, and provides a low-cost mechanism for doing so, is a step in the right direction.
At this time, there does not appear to be a lot of information available on the U.S. Treasury website. However, most of the outlines of the plan appear to be covered in this White House Fact Sheet.
What say you SavvyReader? What are your initial thoughts on MyRA?