In the most recent State of the Union Address, President Obama unveiled the myRA – My Retirement Account. Another retirement savings option? Yes. In addition to 401k, 403b, IRA, Roth IRA and a host of other types of retirement accounts, later this year we can add the myRA to the list.
In this article we’ll cover what you need to know about a myRA and whether it’s a good option.
Spoiler Alert: I believe myRAs aren’t right for most people. While they do have some advantages, the disadvantages for outweigh them.
1. It’s a workplace savings account with a twist
You contribute to a myRA through deductions from your paycheck. Similar to a 401(k), myRAs offer the convenience of employer deductions from your paycheck in amounts you determine.
The myRA option is available only to those employed. Unlike a 401(k), however, employers do not administer myRA accounts. Your employer is simply the vehicle to funnel your contributions from your paycheck to the myRA account.
2. You qualify based on income
Qualifying for a myRA is similar to qualifying for a Roth IRA. There are income limits. In 2014 if you’re single and make less than $129,000 or married filing jointly making less than $191,000 a year, you can open and contribute to a myRA. If you make more, you cannot open a myRA.
Also similarly to Roth IRAs, the myRA has contribution limits. The annual limit is $5,500, plus an extra $1,000 for people age 50 and over.
A myRA is capped at a total contribution of $15,000. Once it reaches that amount, it needs to be rolled into a Roth IRA. A myRA can only be open for 30 years. So even if you haven’t hit the $15,000 limit, you’ll have to roll your money into a Roth IRA after 30 years. (Hopefully it won’t take you that long to amass $15,000.)
3. You have no investment choices
Another way that the myRA differs from a traditional or Roth IRA is that you don’t have any investment choices. All the money gets invested in the G Fund – Government Securities Investment Fund. Government employees who use a Thrift Savings Plan will be familiar with this fund, as the G Fund is available in a TSP.
Unlike a regular IRA you might open through Vanguard, for instance, you don’t get to pick and choose where you invest your money. And you cannot invest in stocks, mutual funds, ETFs, or even other types of bond funds.
This is the biggest drawback to the myRA. This is why I’m not a big fan of it for most people. This is especially true because the G Fund hasn’t had great returns. In 2012, it only returned 1.47%, and for 2013, it was only 1.89%. From 2003 to 2012, it averaged a 3.61% annual return, slightly above the average inflation rate of 2.5%.
4. Total contribution limits are like IRAs
As with IRAs, your total contribution to a myRA counts towards your contribution limit for all IRAs. If you put $5,500 in a Roth IRA, you can’t put anything into a myRA, even if you qualify for one. Likewise, if you contribute $5,500 to a myRA, you can’t put anything into a Roth or traditional IRA.
You can always contribute a little to each type of account, but your total limit is still $5,500 (with the additional $1,000 for people age 50 and over).
5. It’s a good first step
I suspect most people listening to the podcast or reading this article would prefer opening an IRA – whether at Vanguard or Betterment or Motif Investing or at a broker. And they’ll probably invest in a Target Date Retirement Fund or a diversified portfolio of mutual funds.
Some folks, however, might not be ready to do that. Some may find the thought of investing through an IRA intimidating. And the idea of the myRA is to make retirement investing as simple as possible, just to get people started investing for retirement.
This isn’t a comprehensive retirement solution, and I don’t think it’s intended as such. It’s just a first step. And if a myRA account helps you or someone you know take that first step, it’s served its purpose.
6. The minimum to open is only $25
The minimum to open a myRA is only $25, so that throws all excuses out the window. And the account has only a $5 minimum contribution per paycheck. The cost of a Starbucks mocha latte will get you a retirement account, even if that’s all your can afford.
As you invest more over time, you’ll eventually outgrow the myRA and will need to switch to a Roth IRA. But the low startup costs are one of the things that make it a decent first step, if that’s all you can afford.
7. Principal is guaranteed (as is a lackluster return)
This is less a function of the myRA itself and more a function of the investment vehicle – the Government Securities Investment Fund. This is virtually a no-risk investment.
(Again, the lower risk comes with lower returns, but that’s the trade-off.)
8. No early withdrawal penalties
One other aspect of a myRA to consider is that there are no penalties for early withdrawal. The Roth IRA, for instance, has a 5-year rule, and you can only avoid penalties if you make early withdrawals for certain purposes – like to buy your first home.
But with the myRA there are absolutely no early withdrawal penalties. So this can actually be a decent alternative to a traditional savings account. It won’t replace stock and mutual fund investments, but last year’s 1.89% returns clobbers today’s savings account options. The best savings rate right now is .9%.
9. Tax-free withdrawals, sort of
This is a confusing aspect of the myRA. According to TreasuryDirect.gov, you can withdraw your contributions tax-free at any time, but your earnings will be taxed if you withdraw them before age 59 1/2. Here’s what TreasuryDirect states: “Your contributions can be withdrawn tax free at anytime; earnings generally can be withdrawn tax free after age 59½.”
So if you do use a myRA as a savings account alternative, you may get into a situation where you’d want to withdraw just your contributions. You can always leave the earnings in the account and later roll them into a Roth IRA.