A few months ago, Pres. Obama proposed a new save-for-retirement program called MyRA. It is designed for the millions of low- and middle-income workers that work for companies that don’t have retirement plans. The White House estimates that this is half of all workers and about 75% of part-time workers. The idea behind it is to give these people the opportunity to save money for retirement. On the face of it, MyRA seems like a good idea. If you choose this program you could use it to put away money for your retirement knowing it would be protected by the full faith and credit of our federal government. But before you ask your employer to implement this program, it’s important to know how MyRA works and its pros and cons – to make sure it would be good for you.
How it works
How this program works is very similar to traditional retirement programs. Assuming your employer signs up for it, all it has to do is make payroll withholdings according to your direction. If your company uses an outside payroll service, the cost to offer this program should be a negligible. If it has an in-house payroll department the costs to accommodate this program should be very modest. Your employer won’t administer your plan. However it can create and distribute information about MyRA to its staff. The money that is withheld from your paycheck will be sent to your account via direct deposit. Like a Roth IRA the money you invest will be after tax dollars and when you retire it will be tax-free. However, unlike a traditional Roth IRA your money will be invested in government savings bonds.
While the MyRA program is targeted towards people who don’t have a conventional retirement program, anyone that has their paycheck direct deposited will be eligible. This means you could use the plan to supplement your existing 401(k) plan – assuming your household income is less than $191,000 a year.
We’ve already mentioned one of MyRA’s biggest pros, which is that your savings would be totally secure.
A second pro is that you would be able to take your MyRA account with you when you change jobs or if you have several part-time jobs and contribute to your account in each of them. You would also be allowed to withdraw your contributions at any time without paying a penalty. Of course, if you withdraw the interest you’ve earned before age 59 1/2, you will have to pay taxes and possibly get hit with a penalty just as is the case with a Roth IRA.
Third, unlike a traditional Roth IRA there won’t be a lot of expenses to administer it as the program won’t have any fees.
Another plus is that you can initially invest as little as $25 and then contribute just $5 out of each of your paychecks through an automatic payroll deduction. And like a Roth IRA, you could contribute as much as $5500 a year.
If you choose to put your money into a MyRA, this can help you learn to save for retirement. When you save through an automatic payroll deduction, this could start you in the habit of saving money.
This program offers some tax relief. When you contribute to a MyRA you may be eligible for the retirement savers credit so that the government is, in effect, paying part of the cost of your contribution.
One of the disadvantages of a myRA is that when your account reaches a total of $15,000 or if you have had it for 30 years you will need to move to a regular Roth IRA. When you do this your money will continue to grow tax-free. Plus, you have the option of switching to a regular Roth IRA whenever you would like.
A second con is that all you can expect to earn on your money is an average of 2%. This means if you were contributing $100 a month, you would have around $6300 in savings after five years, which would include about $300 in interest. In other words, a myRA offers no risks but you’re never going to earn a lot of interest on your savings either.
Unlike a 401(k) where the money you save is pretax, this program does not offer this benefit. Plus, there is no employer contribution. As noted above, contributions to this program are made with money you’ve paid taxes on. You can’t exclude or deduct anything.
Since the cap on a MyRA is just $15,000 there is no way this program can provide you with a secure retirement. The sad fact is that there is no way that $15,000 can give you a meaningful amount of income when you retire.
This program offers the same interest rate as the government’s Thrift Savings Plan Government Securities Investment Fund (G Fund) that it offers federal workers. It is so modest at 2% that it might not even beat inflation. For example, in 2012 the interest rate on G Accounts was 1.5% and inflation that year was 1.7%. The G Account interest rate in 2013 was 1.74%, which is just a bit more than the rate of inflation, which was 1.5%.
One of the bigger cons of a MyRA is that you can’t invest the money in stock mutual funds or bonds and earn a better return. The G Fund returned an average of just 1.89% over the past year. This means your savings will never grow the way it would if you were able to invest in a well-managed 401(k).
As written above the program has an income limit of $191,000 for families or $129,000 for individuals. If you’re making that much and not already putting away an adequate amount of money for retirement, you might need a tougher accountant or to have a long talk with yourself.
Finally, if you’re nearing retirement and you’re just now starting to think about putting money away, this program is not going to save you.
Would this make sense for you?
A MyRA account could be a good option if your employer agrees to participate in the program. The Obama administration has said that it will push employers hard to sign up for MyRA but that doesn’t mean all of them will. The program might also not make sense for you if you have a number of part-time jobs as not all of your employers may sign up for MyRA. However, if you’ve had a hard time saving money for retirement or haven’t been able to us save any money at all then a MyRA account could be a good option as it would not only help you save money but would also help you learn to save regularly. While you would not earn a lot of interest on your savings you would earn some and your money would be totally secure. Last but not least, if your employer doesn’t offer a 401(k) or some other qualified savings program then a MyRA could literally be better than not