In last month’s State of the Union address, President Obama unveiled plans for the new myRA retirement account to help Americans start saving for retirement. With so many options, how can investors be sure the myRA is the right choice? Kyle Jones, Financial Planner at Wamhoff Financial Planning & Accounting Services, offers his advice.
1. What is the myRA:
- myRA is a government-backed retirement account that will be targeted to low and middle income Americans who are most likely to not be currently saving for retirement.
- These folks typically don’t have access to employer-sponsored plans such as a 401(k).
- Those who participate in the plan must have a household income below $191,000 per year.
- Contributions to the plan can start as low as $5 deducted per pay period, with annual contributions capped at $5500 per year.
- The myRA plan will allow after-tax dollars to be invested, with money withdrawn in retirement tax-free.
- The money is then invested in government securities. According to the White House, rate of return will be similar to the Government Securities Investment Fund which had a rate of return if 1.5% in 2012.
- The President, in his speech, also noted this to be a risk-free investment, and will help people start saving.
2. The Pros:
- For those who haven’t been able to participate in a plan, either because their employer didn’t offer one or because they felt they didn’t have enough money to save, this is a great first step.
- Even if your employer doesn’t sponsor this plan, you can still sign up. Once the program is fully launched, if you have direct deposit for your paycheck you can sign up.
- For those who are risk-averse, this can be a good option, as the President has touted this as a risk-free savings plan because the accounts will be backed by the government.
3. The Cons:
- You cannot participate if your household income is over $191,000 per year.
- While this is a risk-free investment, it’s also a low rate of return investment because it’s only invested into government vehicles.
- With a low rate of return, you may not keep up with the rate of inflation.
- The investment does have interest rate risk – as interest rates rise, bond values decline.
- It is currently being touted as allowing for tax-free withdraws in retirement. The government has changed its stance on not taxing these types of things in the past (such as not taxing Social Security).
- Some critics are wondering if this is a tactic meant to get more money flowing into the Treasury coffers to fund budget shortfalls by encouraging more investment in unqualified funds. MyRA, like the Roth and Traditional IRA, is such a fund.