Monday, February 3, 2014

10 Things You Should Know About the New ‘myRA’ Retirement Account

10 things you should know about the new ‘myRA’ retirement account

During his State of the Union address last Tuesday, President Obama announced plans for the creation of a new type of retirement account, myRA, aimed at helping low-to-middle-income workers start saving toward retirement. On Wednesday, the President followed up by signing a memo directing the Department of Treasury to formally create the new account.

While it is still too early at this point to know all of the details and caveats about how myRA will turn out, here’s what I have gathered so far:

1.      Your employer will have to sign up in order for you to be able to contribute.
2.      To be eligible for a myRA, your yearly household income must be less than $191,000.
3.      You may open an account even if you already have a 401(k), granted that you meet the other thresholds, of course.
4.      You can only contribute through direct payroll deductions, but all your contributions must be in after-tax dollars. You can start with as little as $25 and continue with as little as $5 per paycheck. No investment fees will be deducted from your account.
5.      You can contribute to the same myRA from multiple jobs. So if you have more than one job, you can direct contributions from all your jobs into the same myRA account.
6.      myRA is a direct cousin of the Roth IRA, in the sense that the most you can contribute in any single year is currently $5,500.
7.      Once your account’s value reaches $15,000, you must roll it over to a regular Roth IRA. Regardless of how much you have in your myRA, you must roll it over to a regular IRA after 30 years, meaning the longest time you can keep your myRA account is 30 years. However, you can convert your myRA to a regular Roth IRA anytime you like.
8.      There is only one investment option. All your money will be invested in the Government Securities Investment Fund (G Fund), which is one of the account options currently offered to federal employees through their Thrift Savings Plan. Basically, your money will be invested in government bonds, so you shouldn’t expect to make a ton of money quickly, if ever. In 2012, the G Fund returned about 1.5 percent, but inflation was 1.8 percent. To be fair, the account is being marketed as a starter account, with the idea that folks will eventually move over to traditional investments. Not to mention that you’d probably end up a broke retiree if you kept your money in a myRA for 30 years.
9.      Your principal will be guaranteed and backed by the U.S. government.
10.  You can withdraw your original contributions at any time without any tax or penalty. Once you retire (after age 59½), all of your money – including your gains – will be completely tax-free. However, if you withdraw your gains before you reach age 59½, you will be taxed, in addition to incurring a 10 percent penalty.

I think this program may be a positive first step, provided that the government can actually get employers to get on board. I find it somewhat ironic, though, that the authorities are using the fact that employers will not be burdened with administrative paperwork to incentivize and recruit businesses to sign up. Perhaps all that needs to happen is to cut the burdensome administrative processes surrounding current work-related retirement plans?

Then the folks must also find the means, willingness, and discipline to sign up and, most importantly, treat myRA as a long-term account. There seem to be mixed messages here, because on the one hand, officials are trying to help alleviate the shortage of retirement savings in America. Yet in the same breath, they are positioning myRA as a convenient savings account you can dip into at will. 
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