Tuesday, February 18, 2014

Is the new MyRA right for you?

While watching President Obama’s State of the Union speech, I was surprised to hear him introduce yet another retirement savings vehicle. In addition to 401(k) and 403 (b) plans, and both the traditional and Roth IRAs, we now have the MyRA (my retirement account).

I was pleased that he stressed the importance of saving money for retirement. Anything that can be done to motivate people to do so is fine by me.

However, I’m a bit surprised that one of the key features and selling points of the new MyRA is the convenience of payroll deductions. Since there’s already a bill in the legislative process to make payroll deductions more convenient for employers with the existing IRA plans, that doesn’t seem to be much of an incentive.

With MyRA, Uncle Sam will pick up all the administrative costs. It only takes $25 to open an account and subsequent contributions can be as low as $5. With these smaller amounts, the target audience is clearly the low-end of the wage scale.

Investments will go into a government bond fund backed by Uncle Sam. The President emphasized that, since the U.S. Government backs deposits, there’s no risk of loss of principal.

That being said, long-time readers of this column are aware that rising interest rates and inflation are enemies of bonds. In other words, the risk of any bond is the loss of “purchasing power” due to inflation. But I’m supportive of any investment that gets people saving for retirement.

The new MyRA is similar to the current Roth IRA in that contributions are not tax deductible and the monies grow tax-free if used for retirement. As I write, not all details are available, but I imagine there will be taxes due on the interest and perhaps a penalty if funds are withdrawn before age 59 ½.

Unlike the other IRA investments, there’s a maximum cumulative total of $15,000 in the account. At that point, the MyRA is transferred into a Roth IRA.

Because the target audience is the low end of the wage scale, I was surprised that the MyRA also has features and benefits for middle and upper middle-income families. For instance, those that currently have an employer-sponsored 401(k) can also participate in the new MyRA.

In fact, families with household incomes up to $191,000 can open a MyRA. Just a word of caution, at this point I’m still waiting to see the final definition of what exactly household income entails. The $191,000 limit is by no means at the low end of the wage scale.

Although I’m pleased that we’re talking about saving for retirement, the fact is that one more choice was just added to an already complex menu. Sometimes in life the biggest step toward any goal is the first step of participation. If the new MyRA gets more people to take that first step, then it will ultimately be a good thing.

If it becomes another government program with overly complex rules, regulations and exceptions to those rules and regulations, then I think it will ultimately have minimal impact.

However, in my book, any time the President discusses the importance of saving, especially for retirement, I am supportive. Hopefully, the new MyRA will be a launching pad for a successful retirement.

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