President Obama recently announced a new retirement account called the MyRA, which stands for My Retirement Account. The MyRA is described by the Obama Administration as a, “simple, safe, and affordable starter retirement savings account.” The MyRA is primarily aimed at individuals who don’t have an employer sponsored retirement account such as a 401k, 403b, Thrift Savings Plan, or similar retirement account. Let’s take a look at the pros and cons of the MyRA account and see if it’s worth investing in.
MyRA Retirement Account Rules
To start with, the MyRA account will be set up through pay roll deductions. It should be available in late 2014, with a full roll out sometime in 2015. Anyone with direct deposit will be able to open an account. Right now it looks like accounts will be opened online and self-administered by workers. This will not be run by employers.
Workers will be able to start with a minimum contribution of $25, and can continue making contributions for as little as $5 per pay check. It’s a very affordable way to begin contributing to a retirement account.
The MyRA will follow many of the same rules as Roth IRAs. For example, there are no tax deductions for contributions. All contributions are made with after tax dollars, and withdrawals in retirement will be tax free. The MyRA will also follow the same contribution limits as Roth IRAs ($5,500 in 2014), and the same income limits ($129k MAGI for single, $191k MAGI for couples in 2014). Based on what we have read so far, Roth IRAs and MyRA accounts share a combined contribution limit, meaning you can’t double dip and contribute the maximum amount to both accounts.
MyRA – Pros and Cons
Benefits of the MyRA: The Treasury Department labels the MyRA account as “Simple, Safe, And Affordable”, with the following benefits.
- Simple: These accounts will be funded by automatic payroll deductions. The MyRA accounts are portable, meaning they are not tied to your employer, unlike 401k plans and other employer sponsored retirement plans. There is only one investment option, which keeps things simple.
- Safe: MyRA contributions are held in Government Securities (bonds) backed by the US Government (these will be the same as the G Fund in the Thrift Savings Plan). Account balances will never decrease in value.
- Affordable: You can start with as little as $25 for your initial deposit, and can continue making contributions as low as $5 per pay period. Contributions can be withdrawn tax free at any time, and earnings can be withdrawn tax free after age 59 1/2. There are no fees.
Downsides of MyRA accounts: MyRA accounts are basically just buying savings bonds from the US government in a retirement plan. That isn’t a problem by itself, as most financial advisors recommend maintaining a certain percentage of your portfolio in cash or cash equivalents. But there are a few downsides you should be aware of.
- Only one investment option: Government bonds.
- Guaranteed returns doesn’t guarantee growth will exceed inflation: Earnings should earn slightly more than a standard savings account, but likely won’t keep up with inflation. The MyRA account encourages people to save, but it won’t increase their purchasing power in the long run.
- Accounts are limited to $15,000. Investors must roll their MyRA account into a private Roth IRA once their balance reaches $15,000, or after they have had it open for 30 years.
Summary: This is Basically a Starter Roth IRA
The premise behind the MyRA accounts is good. President Obama wants to encourage people to save for retirement. But this is something people can do for themselves with a Roth IRA. And they would have more investment options than a simple government secured bond which most likely won’t even keep pace with inflation.
Overall, most people would be better off taking the time to set up a Roth IRA through a private investment firm where they can have access to a wider range of investment opportunities. Investors can easily set up an automatic contribution from their checking or savings account, or even from their pay check if their employer offers the option.
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Ryan, I agree with you concerning stocks, bonds and target date funds, my recommendation is having the government offer a few index funds. E.g. US Growth, US Large Cap, US Small Cap, and maybe others would give the exposure to some risk when used with investment education like asset allocation and diversification principles which could be offered as part of the program. But I still think a young (20’s) worker who starts building an investment nest egg for 5-10 years while learning about investing from information provided with monthly account statements should be not only ready to intelligently add risk exposure, but should be financially smart enough too. Another example: After a few years of educating my son on investing in mutual funds for retirement (not day trading) he/we selected a very highly rated fund. The market soon hit a low and instead of taking my advice to buy more – he was dollar cost averaging – he sold for a loss. Later, when the market recovered to even higher levels he realized and understood much better how retirement investing works. If he had the MyRA, which I would have encouraged him to use even though I would have been his investment advisor, he would have seen the “Up then Down then Up . . . ” long term process without the loss he suffered. Note: He didn’t tell me he was going to cash-out of his IRA until after. If he had the MyRA at the time he would have been better able to see how financial markets and time work to the advantage of retirement investing. I explained how time and his approximately 50 years of investing worked . . . but as a youngster he just could not internalize it and sleep well at night. And . . . thanks for your sharing your thoughts on these important MyRA RETIREMENT investing issues.
Another ‘PRO’ is that novice investors will not be subject to the perils of the private investment ‘advice’ from fee based stocks, bonds and mutual funds. I’m not saying all private companies or their ‘investment advisors’ are bad . . . but all too many are, and the investment fees add up. Bad investment advice will leave novice, or non-investors, ******* without their knowledge. They will end up with little or no RETIREMENT money. It’s better for folks with little or no investing experience or education to have their RETIREMENT funds safe in government bonds. When they have acquired $15,000 they should have had time to learn the basics; or they should have.
Of course, if investment companies and their staff were, by law, obligated and subject to fiduciary responsibilities and liabilities that would change my view. But they have fought hard against any meaningful regulation that protects the non-investor class of workers. How about a follow-up article in ten years (~15K max invested at ~$1,500/annually) to see how the self-directed ROTH accounts of folks with no investment knowledge compares to the government bond program. IMHO any self-directed ROTH account that has less than the comparable government bonds would be a total failure of the ROTH self-directed program. My guess is that the self-directed who are ignorant of investments will potentially have been at the mercy of product salesmen.
Disclaimer: When IRA’s first were introduced, and I had no investment experience, the stock broker who gave me ‘advice’ put me into investments that lost half their value in one year. In hindsight they were high fee products that were not suited to my situation. I learned that hard lesson, taught myself investment fundamentals, and have been a successful self directed investor. Had the MyRA program existed then, I would have not lost half my investment but would have had time to learn investment fundamentals and would have had the funds to invest.
Ryan Guina says
Ron, I agree, there should be regulation requiring investment advisors to have a fiduciary duty to their clients. I had a similar experience in which I was recommended a mutual fund with a large up front load and very expensive fees. I didn’t know any better and bought into the investment. Like you, I took it upon myself to learn more about investing and I avoided making similar mistakes with future investments.
That said, only investing in a glorified savings account won’t do much for anyone who needs to build long-term retirement funds. A better solution would be for the government to offer the MyRA in a target date fund where there would be exposure to stocks and bonds, which would increase the opportunity for growth. Yes, there would be the possibility of loss of principal, but that happens with most investments that aren’t 100% in government bonds or in a savings account style “investment.”