A new acronym has been added to the lexicon of savings and retirement plans - the myRA. That stands for My Retirement Account and is a twist on the well-known IRA or Individual Retirement Account.
President Barack Obama announced the new payroll deductible savings vehicle in his State of the Union Address January 28. In a prepared statement, the White House called the myRA “a new simple, safe and affordable starter retirement savings account that will be available through employers and help millions of Americans save for retirement.” The new savings vehicle is one of several items Obama offered to implement through executive action. (See "For IRAs, Time Is Money.")
The myRA is to be offered through a Roth IRA type of vehicle. There’s a $15,000 limit on how much can be accumulated in the myRA over a period of 30 years, according to a fact sheet released January 29 by the White House. Once the balance is greater than $15,000, it would need to be transferred to “a private sector Roth IRA,” according to the fact sheet. Thus, myRA appears to be targeted toward lower-income workers who currently do not save for retirement through a plan available at work. Income earners as high as $191,000, however, can open a myRA.
Given that the myRA is a Roth plan, existing laws governing Roth IRAs are likely to apply. Thus, contributions to the plan are not tax-deductible. However, earnings from investments in the myRA will accumulate tax free and distributions from the plan will not be taxed. (See "How IRA Contributions Affect Your Taxes.")
“It’s a beginner’s plan,” says Lynn Dudley, senior vice president of retirement and international benefits policy at the American Benefits Council, an organization that represents employers to Congress and the executive branch in Washington, D.C. on employee benefits issues. “It’s intended to jump start savings amongst a group of people who don’t have retirement plans readily available to them.”
The Pension Rights Center, an advocate for employees and retirees, sees a lot to applaud in the plan. The myRA is “an important first step in offering an easy, secure place where lower-income people who are not covered by an employer retirement plan can begin to save for retirement,” says Karen Friedman, executive vice president and policy director at the Center.
The myRA is only available for employees through the workplace and participation is voluntary for employees. The plan will be available to all employers, whether they are in the public sector, private sector or the not-for-profit sector. Employers will not be required to administer the plans - only to forward the employee’s contribution. Employees will be able to set up an account with an initial contribution of only $25 and can make regular payroll deductions for as little as $5, giving the plan appeal to even the lowest income workers.
A lot of the details are yet to come and the information released in the fact sheet raises a number of questions. For example, the plan is portable from one participating employer to another. What if an employee leaves a job at an employer who provides access to the myRA and goes to work for one that does not? Will the employee no longer be able to contribute to the myRA after changing jobs? Also, under IRA rules, withdrawal before age 59 ½ comes with a penalty. Presumably that also applies to the myRA.
The myRA has only one investment option, a mix of Treasury bonds that is identical to the government bond investment option that now exists in the Thrift Savings Plan, a retirement savings plan for federal employees. The government guarantees the principal invested in the myRA. However, yields on Treasuries are currently fairly low. For beginners, who are typically risk adverse and likely to choose conservative investments, the fact you cannot lose your principal could make it an attractive way to begin to save for retirement. (See "Understanding Bond Prices and Yields.")
Treasury is expected to ask participating employers to help employees set up their myRA, according to Alan Glickstein, senior retirement consultant for Towers Watson in Dallas, Texas. “The idea is it’s going to make the process easier by providing deductions through payroll and help set up the account through the employer,” he says. Glickstein views the myRA as a helpful addition to the array of retirement vehicles that now exist. “It may get some people over the hump who are not currently saving into a world where they are starting to save.”
The myRA is “implementable under existing rules,” says Glickstein, but it cannot go forward until Treasury lays out the details of implementation. “When Treasury explains how it is going to work, it will be ready to go and it will be ready to go this year,” he says.
Many in the employer community are welcoming the proposal because it fits comfortably into the existing world of employer plans. “It’s intended not to encroach on employer-sponsored plans,” says Dudley at American Benefits Council. Thus, she argues, it recognizes the employer sponsored plans “are a good thing and we want people to grow into those, whenever they can.”
“It’s a pretty good idea,” says Ed Ferrigno, vice president in Washington for the Plan Sponsor Council of America, which is based in Chicago. It is one more way to cover more employees through the existing retirement system. “This is a positive, working on the assumption there’s no mandate.”
Ferrigno, however, finds it “very disturbing” the White House in its fact sheet also calls for limits on the tax preferences for existing retirement plans. The fact sheet claims two-thirds of the tax benefits for retirement plans go to higher income households and it reiterated its support for President Obama’s prior proposals to limit tax benefits for higher income households. “Going after the tax treatment of retirement plans does nothing for the middle class,” Ferrigno says.
The White House differentiates the Roth IRA vehicle for the myRA from “a private sector Roth IRA” in its fact sheet, hinting that the accounts will be administered by the government on behalf of employees - although the actual administration could be done by a private sector company under contract to the government. That is how the Thrift Savings Plan is administered.
“We like the fact that these plans are government-backed, they earn the same interest as the Thrift Savings Plan, and workers’ money won’t be eaten up by fees,” says Friedman at the Pension Rights Center. The Center, however, would like to see the Obama Administration and Congress do more to provide for a way to improve retirement benefits for employees. “We hope that myRAs are just a start to comprehensive solutions to the retirement crisis,” she says.
Proposed Auto IRAs
The White House also stated in its fact sheet it intends to go to Congress to seek new legislation to create an automatic payroll-deduction IRA that can offer a range of investments. The White House stated the Auto IRA can provide low and middle income workers with the kind of “tax benefit” enjoyed by higher income earners - that is, the interest earned from the investment will accumulate tax free, as well as withdrawals from the IRA.
The White House proposal to Congress is expected to provide a way to defray “the minimal administrative costs of establishing auto-IRAs for small businesses, including through tax incentives,” according to the fact sheet.
The Bottom Line
The myRA the U.S. President Barack Obama discussed in his State of the Union address promises a government-backed, affordable way for low- and middle-class Americans to save for retirement. As with the Roth IRA, contributions made to myRA are unlikely to be tax-deductible, but earnings and payouts will be tax-free. MyRA can be seen as a retirement plan for beginners - earnings are capped at $15,000, after which the funds have to be transferred to a private sector Roth IRA.