Ideally, retirement income for seniors should consist of a three-legged stool consisting of (1) Social Security, (2) savings, and (3) pensions. Unfortunately, most Americans lack at least one of the three legs. About half of all American workers, and 75% of part-time workers, lack access to employer-sponsored retirement plans like 401(k)s. To help alleviate this problem, President Obama has directed the U.S. Treasury Department to establish a new type of retirement account called the “MyRA.”
A MyRA is intended to serve as a tax-advantaged starter retirement savings account for Americans who don’t have access to an employer-sponsored retirement savings plan. It will work much like a mini-Roth IRA. Contributions are not tax deductible, but no tax need be paid on the income earned on the money in the account, and withdrawals after age 59.5 are tax free. You can withdraw your contributions tax free at any time, but early withdrawals of earnings are taxable.
If your employer participates in the MyRA program, you’ll be able to fund your account through payroll deductions that are directly deposited into your account. These deductions can be as low as $5 per payday, and you can enroll with a $25 minimum contribution. You can invest a maximum of $5,500 per year ($6,500 if you’re 50 or older). Unlike the case with many employer-sponsored retirement plans, there will be no employer matching of employee contributions to MyRAs. Nor will employers administer the accounts; instead they will send the direct deposit to each participating employee’s MyRA. No fees will be charged to participate in the plan. Your MyRA goes with you if you switch employers.
All contributions into MyRA accounts will be invested in the Government Securities Investment Fund (“G Fund”)—the same Treasury security used for federal employees’ retirement contributions to the federal employee Thrift Savings Plan. This means that the money in a MyRA will never go down in value, and will earn the same interest rate that federal employees earn on their retirement savings. In recent years, annual returns have been between 1.47% and 2.97%.
Since the MyRA is intended to be a starter retirement account, when your balance reaches $15,000—or after 30 years—you must roll it over into a Roth IRA with a financial institution. But you have the option to switch to a Roth IRA at any time.
By the end of 2014, workers whose employers choose to participate in the initial MyRA pilot program will be able to sign up online.
If you don’t have any other retirement savings account, opening an MyRA could be a good way to start. If you’re near retirement, a MyRA could be a good place to park some cash and earn higher interest than you could obtain with a certificate of deposit.
However, due to the lack of investment choices, MyRAs may not be so great as long-term investments for younger workers. The returns they’ll earn—while safe—will be relatively low and may not even keep up with inflation. Thus, for the long term, you should consider opening a traditional or Roth IRA with a financial institution and thereby obtain many more investment options—for example, there are many low-cost or no-fee IRAs that offer an array of mutual funds investments.