Money Management

In his 2014 State of the Union address, President Barack Obama announced the introduction of the MyRA plan, as a way to get more Americans to begin saving for retirement. What does this mean for your investments? Can you open a MyRA account before the end of the year to take advantage of tax benefits? In this article Investorjunkie.com explains what the MyRA plan is, as well as the pros and cons to help you decide if it will be right for your retirement plan.

What is a MyRA Account?

MyRA is short for My Retirement Account. The plan will be offered through employers, but isn’t something they’ll maintain the way they do with 401(k) plans.

The program is targeted at people who have no other savings accounts for retirement. It’s thought by creating an advantageous program for low-income earners, and those who do not have the availability of an employer-sponsored plan, it will help kick-start retirement savings across the country.

The program is intended to be an entry-level retirement plan, which will eventually get investors interested in moving up to more traditional plans.

As it is designed, MyRAs will have some similar features to Roth IRAs, but enough variations that it will be an entirely new program.

The plan details are expected to be finalized by December 31, 2014 and is being rolled out this year as a pilot program with limited participation. It will be available only to those who are not currently covered by employer-sponsored retirement plans, and only to people in households earning less than $191,000 per year.

Eventually, however, it’s expected to be extended to low- and middle-income households who do have an employer plan.

How Does a MyRA Account Work?

Not a lot of detail is yet known about the plan. But as it stands now, MyRAs are to be set up with similar characteristics to Roth IRAs:

• Maximum contribution is $5,500 per year
• Like a Roth IRA, contributions are not tax deductible when made, but investment earnings accumulate on a tax-free basis
• Also like a Roth, the money withdrawn is taken out tax-free
• Contributions can be withdrawn any time, but investment income taken out before age 59 ½ will be subject to taxes and penalties

So far, so good. But here’s where a MyRA account shifts gears:

• The account will be held with your employer, who will “neither administer the accounts nor contribute to them”
• The accounts will be fully transferable from one employer to another
• You will not have a choice as to how the money in the account is invested
• Investment earnings are tied to the Thrift Savings Plan Government Securities Investment Fund, or TSP
• There is no risk of principal loss, as it is guaranteed by the U.S. Government
• There will be no administrative fees on the accounts
• Accounts can be opened with as little as $25, and funded with contributions as low as $5 per paycheck
• The income limit on the program is $191,000
• Eventually you’ll be able to make contributions even if you’re covered by another retirement plan
• The account must be rolled over into a regular Roth IRA once the account is 30 years old, or the balance reaches $15,000

As more info becomes available, we’ll continue updating this post.

The Case FOR a MyRA Account

If you cannot have an employer-sponsored retirement plan, or have not been able to save for retirement for any reason up to this point, a MyRA account may be an excellent option. It will at least get you started with retirement savings, and for many people that’s the single biggest obstacle.

Another major plus for the plan is investing is completely risk-free. The money will be invested in U.S. government securities, which guarantees repayment of principal. You’ll be able save money without fear of loss — which is another reason low-income people fail to save and invest for retirement.

There’s also the obvious advantage of being able to open the account with very little money, and to fund it with just five dollars per paycheck. Since IRA plans typically require contribution minimums of $50 or more, this should prove to be a major plus for low-income investors.

The Case AGAINST a MyRA Account

While MyRA accounts definitely have certain appeal to people who have not saved for retirement, there will be very little incentive for those who already are.

Consider the following:

You will not be able to retire on $15,000. The account limit of $15,000 means the plan will do little more than enable you to accumulate a modest emergency fund for retirement. This is not the kind of capital (continue reading Is a MyRA Account Right for Your Retirement Plans? by Investorjunkie.com)