(image credit to The Monday Face)
In the State of the Union of January 2014, President Obama announced his plans to introduce a program called “myRA” which stands for My Retirement Account. It’s specifically built for workers who may not have a current retirement account, but would like to start building a nest egg. Here are a few of the specifications for opening a myRA.
How does it work?
The account is essentially a Roth IRA, so the contributions that you make each month are made tax-free, and through direct deposit (which means that your work will first have to offer the program). Your contributions are made automatically on whatever day works best for you, like a certain day of the month, or multiple paydays within a month. If/when workers switch jobs, the account stays with you since your employer isn’t administering the account, so no worries on that front.
The funds that you deposit are invested in government savings bonds, and backed by the U.S Department of the Treasury, so savers can never lose their principal investment. The cap on myRA contributions are $5,500, a year under current limits, just like with regular Roth IRAs.
This new program is mainly aimed at low to middle-income americans who don’t have access to employer-sponsored retirement plans. With no fees to maintain the account, and no fees to open the account, it’s ideal for the target demographic. But all workers may invest in a myRA, including those who would like to supplement an existing 401k plan, as long as their household income falls below $191,000 a year.
What are the downsides?
One of the main downsides is that it’s not a long-term retirement plan. The myRA plan is mainly meant as a kickstarter for your retirement, because once a participant’s account balance hits $15,000, or the account has been open for 30 years, they will have to roll it over to a private sector Roth IRA, where the money can continue to grow tax-free. Another downside is interest that the account will gain, you’re not going to have a huge amount of earnings on this account. The White House said the accounts will earn the same rate as the Thrift Savings Plan’s Government Securities Investment Fund that it offers to federal workers. That fund earned around 1.5 % in 2012, and had an average annual return of 3.6% between 2003 and 2012.
The lack of investment control that the account holder has might also be a downside for some. As we said above, the funds are invested in government savings bonds, and so subsequently, the opportunity for workers to have some investment freedom is out the window unfortunately.
The truth is that no one thinks this alone will fix the fact that millions of Americans have little-to-no retirement savings, but retirement advocates are cheering on the new program as an important step in the right direction.