Make way for a new type of retirement account.
President Obama, who proposed the “MyRA” in his 2014 State of the Union address on January 28, signed an executive order yesterday authorizing creation of these new accounts. The MyRA is intended to encourage retirement savings by workers who currently aren’t participating in an employer-sponsored retirement plan.
The main attraction, as suggested by the president, is the combination of tax benefits with the security of an investment backed by the full faith and credit of the US government.
“It's a new savings bond that encourages folks to build a nest egg,” Obama said in his speech. “MyRA guarantees a decent return with no risk of losing what you put in.”
He also emphasized that there are no fees attached to the account.
The basic concept is relatively simple. As with a Roth IRA, a retirement-saver may contribute after-tax funds up to an annual threshold. The contribution limit for 2014 is $5,500, or $6,500 if you’re age fifty or older. These contributions may grow and compound without any current tax erosion, and qualified distributions are tax-free. However, payouts of earnings before age 59 1/2 are subject to tax, plus a 10 percent penalty tax may apply.
Unlike most taxpayers with a Roth IRA, retirement-savers won’t have to worry about fluctuating markets. Only a single investment option is allowed: a US Treasury bond offering the same variable interest-rate return as the one realized by federal employees who enroll in the Thrift Savings Plan Government Securities Investment Fund. According to an article in the Wall Street Journal, the fund posted an annual return of 1.47 percent in 2012, with an average annual return of 3.61 percent from 2003 through 2012.
Assuming an annual return of 1.5 percent, the Wall Street Journal reported it would take a worker contributing $50 every two weeks almost eleven years to accumulate $15,000. In other words, retirement-savers will have the peace of mind that goes along with investments in US bonds, but a low rate of return that most likely won’t compare favorably with other options.
Once the account balance reaches the magic $15,000 mark, participants must roll over the funds to an IRA at a private financial services firm. At that time, they will be free to select from the usual menu of investment choices.
The MyRA offers a great deal of flexibility for participants. You will be able to roll over the account to another one if you switch jobs or set up multiple accounts if you have more than one job. Furthermore, initial investments may be as low as $25, with subsequent payroll deductions of $5 or more allowed per pay period. And you can withdraw funds at any time without restriction other than the aforementioned tax consequences.
As with Roth IRAs, certain upper-income taxpayers will be barred from making MyRA contributions. The upper threshold for 2014 is an adjusted gross income (AGI) of $129,000 for single filers and $191,000 of AGI for joint filers. This new vehicle is targeted mainly to younger workers and low-to-middle-income taxpayers.
Initially, the MyRA will be offered only through employers, but it is expected that it will eventually be expanded to accounts at financial institutions. As of this writing, there’s no word on when MyRAs will become available. We will keep you up-to-date on any important developments.