Editor's note: On July 28, 2017, the Treasury Department announced it would shut down the myRA program. The article below reflects conditions as of December 17, 2015.

In his State of the Union address in 2014, President Barak Obama introduced a new savings account that would soon become available to Americans looking to save money for retirement: The myRA. This new account is designed to help millions of Americans who have not been able to save for retirement thus far to begin socking away extra dollars into this account so that they can have something to draw on in their later years. But many financial advisors and critics are skeptical of this new account and whether it can really get lower and middle-class Americans to really begin saving for the future.

How it Works

The myRA is essentially a Roth IRA, and has the same contribution limits and tax rules. However, it is designed for Americans with incomes low enough to allow them to make Roth IRA contributions and do not have access to any type of employer-sponsored retirement plan such as a 401(k). There are absolutely no fees of any kind for this account or minimum balances that can be imposed by any kind of financial institution, although the initial contribution amount must be at least $25. The money that is put into these accounts is then invested in savings bonds that will pay the same rate that government employees earn in the guaranteed fund in their thrift savings plan accounts. And while this rate of return isn’t terribly exciting, it is guaranteed for interest and principal by the full faith and credit of Uncle Sam. (For more, see: Hello, myRA: Retirement Savings for Beginners.)

One key difference between myRAs and other types of retirement savings vehicles is the owner’s ability to withdraw their contributions from them at any time without tax consequences, but earnings will be subject to a 10% early withdrawal penalty. MyRAs can grow until the balance in them reaches $15,000, and then they must be rolled over into regular Roth IRAs. Employees can opt to have a portion of their paychecks put into this account in the same manner as a 401(k) or other retirement plan, but employers are not required to offer them, and there are no matching contributions. However, the plan is portable, so workers who go from one employer to another can take this account with them.

Savers can also make contributions from either their checking or savings accounts and can divert their income tax refunds into the myRA as well. The annual contributions that savers make into the myRA are also aggregated with other IRA contributions for the year, so it is not possible for them to max out the myRA account and also make the maximum possible contribution to another traditional or Roth IRA. But contributions to the myRA can also count towards the Retirement Savers Tax Credit for those who qualify. (For more, see: Saver's Tax Credit: A Retirement Savings Incentive.)

A Viable Solution?

Although some advisors are hopeful that the myRA will indeed open the door for many Americans who currently have no savings to begin putting away money for the future, many financial experts do not believe that these accounts will ever gain much traction. Although the government guarantees that back the savings bonds that these accounts are invested in may entice potential savers who are worried about losing money on their investment, the relatively low return offered by the Treasury securities may not be enough to generate much excitement among those who are not already investing in other guaranteed instruments such as certificates of deposit (CDs) or fixed annuities. But the lack of fees and salary deferral feature of this account will make it easier for those who have no savings plan of any kind to create at least some sort of nest egg. (For more, see: The Three Stooges Debunk myRA.)

Treasury Secretary Jacob Lew acknowledged the limitations of this plan in November 2015 in his announcement of the plan’s nationwide rollout. "We would never argue that $15,000 is adequate retirement savings, but you've got to go from zero to $15,000 before you can really get into the habit. Getting people started, getting people into the habit is the kind of change in behavior that leads to the build-up of a more significant retirement cushion." The Treasury Department has hopes that many employers of low and middle income workers will start to offer the myRA to their employees because there will be little to no cost to them to do so. The ultimate objective of this account is to help the half of American households that have no retirement savings whatsoever to develop the habit of saving.

The Bottom Line

Just as robo-advisors are trying to position themselves as a way for small investors to receive a rudimentary level of money management, the Treasury department is hoping that the myRA will become a key savings tool for those with low incomes and little or no financial knowledge. For more information on myRAs and how they work, visit the myRA website at www.myra.gov. (For more, see: The Devil in the Details: Five Retirement Budget Proposals.)                                                                                          

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