The New myRA

Dec 23, 2014 by

myRA accountAre your household earnings less than $191,000? Then you’re eligible to open the new myRA account President Obama created by executive order this year.

But should you bother with the myRA? Let’s run through the pros and cons.

What’s Good About a myRA

  • With respect to taxes, myRAs work like Roth IRAs. That means you contribute with after-tax money, but pay no taxes when you withdraw money from your myRA. All of your earnings in a myRA are 100% tax-free, if withdrawn after age 59-1/2 and after the account is at least five years old. That’s good!
  • Setting up a myRA is easy, if your employer offers the account. Though myRA’s are not an employer-sponsored plan like at 401(k), contributions to myRAs are made through a payroll deduction. Your first contribution can be as little as $25 and subsequent payroll deductions can be only $5. You don’t have to be a fat cat to start saving for retirement in this tax-advantaged savings vehicle.
  • You can contribute up to $5,500 per year—the same as Roth and Traditional IRAs. (Note that in 2015 you can contribute a maximum of $5,500 total to all—not each—of your IRA-type accounts, including your myRA.)
  • This is huge: myRAs have no fees! (This guarantees they’ll be dissed by Wall Street. 🙂 )
  • Millennials, check this out: the federal government guarantees that you will never lose money you contribute to a myRA! (Of course there’s a downside to any guaranteed return: see below.)
  • myRAs are portable. Change jobs, and your account goes with you. Also, if you have two part-time jobs, you can contribute to your myRA through a payroll deduction at each.

What’s Not So Good About a myRA

  • Savers who are not interested in or are intimidated by stocks and mutual funds and ETFs and REITs and so on may consider this feature of myRAs to be a plus, but myRAs offer just a single investment option: a Treasury bond that will offer the same variable interest-rate return as the benefit federal employees get when they enroll in the Thrift Savings Plan Government Securities Investment Fund (TSP). So while myRA account holders can’t lose money, they’re unlikely to earn a high rate of return either. The average annual TSP return from 2003-2012 was 3.61%.
  • When a myRA account balance reaches $15,000, the account holder is required to roll the money over to a Roth IRA with a private sector financial services firm (aka, a Wall Street fee fiend!). And once you reach the $15,000 milestone, you can’t start anew with another myRA. You’re done with myRAs, forever.
  • Like IRAs, if you take your money out before age 59-1/2, you’d be subject to a 10% tax penalty. That means 10 percentage points on top of your normal tax rate.
  • You can only contribute to a myRA through a payroll deduction, so the unemployed can’t open or contribute to an account.

Should You Open a myRA?

Given today’s extraordinarily low interest rates, myRAs accounts will generate low returns (the TSP returned 1.47% in 2012.) But with that said, there is a place in everyone’s retirement savings strategy for a rock solid investment with a lower but return but guaranteed principal preservation. If you have no portion of your retirement savings today in such an investment, a myRA may be a good idea to help mitigate the overall riskiness of your investment portfolio.

If you’re the sort who is scared by the prospect of investing and so have your cash in a bank CD earning something like 0.02%, you should definitely open a myRA. Your money will enjoy protection equal to FDIC insurance, and you’ll earn a considerably greater return than you are today.

And if you’re not saving for retirement at all, with no fees and a simple account opening process (just ask your employer), the myIRA is a great way to get started. Payroll deductions make saving easy, and hardly hurt a bit! As mentioned above, you can contribute as little as $5 per paycheck.

With the advent of the new myRA, no employed person has an excuse for not saving for retirement!

Will you open a myRA account? Why or why not?

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