During Tuesday's State of the Union Address President Obama announced he was asking the Department of the Treasury to create a new retirement account called MyRA.
(Get it? It rhymes with IRA.)
The creation of an entirely new retirement account doesn't happen every day, year, or even Presidential term.
Why did Obama go out of his way to create a new type of retirement account?
And how does MyRA work compared to other retirement investing options?
Retirement saving rates for low- and middle-income Americans without access to an employer-sponsored retirement account are dismal. Some estimates show that about 50% of full-time employees and 75% of part-time employees lack access to an employer-sponsored retirement account like a 401k plan.
This is a big deal from a macroeconomics standpoint. Studies show that when an individual has a retirement option at work they are significantly more likely to save for retirement.
Even better are the plans that automatically enroll you to contribute plus increase your contributions annually. (For example, your employer might set your contributions to 3% of salary when you start, and that number rises 1% per year until you max out the 401k contribution for the year.)
Without access to that employer plan, automatic enrollment, and automatic contributions, many people simply don't save for retirement. Those that do save face a hurdle of complex investments, fine print with brokerage firms, and lots of choices.
A simple option is needed to simply get people started with investing. It doesn't have to be high growth. It just has to be a start.
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What is MyRA?
MyRA is the new retirement account the Obama administration has declared into existence. Here are some of the important details of how it will work.
Acts Like a Roth IRA
Roth IRAs are fantastic retirement vehicles because you put in post-tax income now, only to withdraw tax-free income when you retire. MyRA will be structured into a Roth IRA, so the Roth's rules apply.
- $5,500 annual contribution limit (Roth IRAs also allow a $1,000 “catch up” contribution if you are over age 50; no word yet if MyRA will utilize the same option)
- Funded with post-tax income so withdrawals in retirement are tax-free
- Contributions can be withdrawn tax- and penalty-free just like a Roth IRA; withdrawing earnings would lead to taxes and penalties
Simple Stepping Stone
The account is designed as a simple stepping stone to get you started with investing for retirement. As we break down the various aspects of the account, that will become more clear.
To underline the point: your MyRA account can only grow to $15,000 before you are pushed out into a regular Roth IRA with a brokerage firm of your choice. No one is going to retire on $15,000; this is just a starting point to build the habit of saving regularly for your golden years.
Investment Choice: One
How simple is MyRA?
You don't get to choose from ETFs, mutual funds, stocks, or bonds.
No, there is one simple choice: government bonds.
The White House has said the accounts will earn the same rate of return as the Thrift Savings Plan's Government Securities Investment Fund that federal workers can choose in their TSPs. The fund averaged a return of 3.6% between 2003 and 2012.
Risk: Virtually Zero
The accounts, and bonds, are backed by the United States federal government. Federal backing removes the risk of loss on the money invested which should encourage people who wouldn't normally invest to get started.
The problem on the other side of the coin is the lack of return on the money invested. Virtually zero risk — the federal government would have to go into complete default — is a good thing, but you sacrifice return to get it. Newbie savers may think that putting money into the account will be enough to get them to retirement when nothing could be further from the truth.
Yet removing risk is a worthy choice when the target audience is the group of people who aren't investing enough for retirement or don't have the habit of saving started.
Who Can Use MyRA?
Roth IRAs, Traditional IRAs, and their 401k counterparts all of income limits as to who can contribute. The same is true for MyRA.
Anyone that earns less than $191,000 per year can use the account even if they have other retirement options available to them. If your work offers a 401k you can still use MyRA.
Since MyRA serves as a Roth IRA you will not be allowed to contribute $5,500 to a Roth IRA and also contribute $5,500 to a MyRA. The two fall under the same limit.
Before even taking this new myRA savings plan into consideration, it is important to do your own due diligence and explore all your retirement options before making any final decision.
Our advice here at Personalincome.org is to place precious metals into your retirement account as it provides diversification and protection from inflation, government solvency, and dollar collapse. Our recommended gold ira company is Advantage Gold for rollovers and IRA setups. Click here to receive their free retirement kit.