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What Are MyRA Accounts, And How Do They Work?

In the 2014 State of the Union Address, President Obama proposed a new retirement savings program known as “myRA” retirement accounts.  This program, created by executive order of the President and managed by the US Treasury, is intended to provide a simple and affordable method to begin saving for retirement, particularly for people who may not have access to a company retirement plan such as a 401(k).  The policy objective is that the creation of myRA accounts will serve to reduce the “savings crisis” in this country, wherein millions of retirees are accruing insufficient retirement savings to last their entire lifetimes.  This article describes the myRA program as initially proposed.1

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MyRA accounts are funded with after-tax money, and both contributions (having already been taxed) and earnings are tax-exempt, much like a Roth IRA.  Like Roth accounts, myRA contributions can always be withdrawn free of penalty.  It is not clear yet whether or not there will be a penalty for removing earnings before retirement age (59½ years old) as with a Roth.  The accounts will be funded via direct deposits from company payroll, much like company retirement plans, and there may be an opportunity for employers to offer matching contributions.  MyRA accounts are available to any single filer with income of less than $129,000, or couples with income below $191,000.  All deposits will be invested in government bonds, and there will be an account balance guarantee (i.e., the balance of the account will never decline).

Perhaps the most innovative feature of the myRA accounts is the minimal contribution limits. Like Roth and traditional IRA accounts, myRAs are expected to have an annual maximum contribution limit of $5,500 (or $6,500 for those over age 50).  However, unlike IRAs held at traditional brokerages, myRAs can be funded with an initial contribution of $25, and ongoing contributions can be as low as $5.  These minimums eliminate potential barriers to retirement saving to lower-income workers, as most financial institutions (including employer-sponsored plans) have significantly higher minimum levels.  Also, the accounts will be free to participants to open and manage, and the administration of the plans will be handled by the government (as opposed to businesses).  MyRA accounts can be converted into a Roth IRA account at any point, and will automatically be converted when the balance reaches $15,000, or when the account has been in existence for 30 years.

The hope is that a simple option with low minimums will inspire more retirement savings, particularly among younger workers, and those with lower incomes, as these are the groups that are expected to be most vulnerable in retirement as company pensions become less common.  While this program will open up a tax-advantaged option to additional savers, it is questionable whether or not an essentially riskless investment vehicle will provide enough return to make a difference for retirees.  For younger workers just beginning to save for retirement, an all-equity portfolio is far more likely to achieve high long term returns over their expected time horizon.  This is likely the reason that the myRA accounts will automatically be rolled into Roth IRA accounts at a balance of $15,000, allowing the account holder to access a wider range of options.  In addition, it is generally believed that at lower income levels the act of saving money has a far greater impact than the choice of savings/investment vehicle used.  Simply providing a cost-effective option to save money can be instrumental in shaping future financial behavior, meaning that the effect of the myRA plan could be greater than just the amount of money saved.

Despite the laudable intentions of the program, there are still many reasons to think that its effects will fall short of expectations.  Primarily, enrollment in a myRA is not automatic, meaning that workers will have to opt into the program.  As IRA accounts are available to anyone with earned income, the fact that savers are not using the current available options does not bode well for a new program with similar enrollment requirements.  Another major issue facing successful implementation of myRAs is the difficulty of convincing low income workers that they have the capacity to save.  Many believe that they cannot afford to put away any money at all due to their current expenditures, though the low minimums on myRA accounts may help with this problem.  Finally, consideration must be given to the fact that there is likely to be a large number of $15,000 Roth IRAs in the near future, which, as financial planning expert Michael Kitces2 points out, makes this segment of future investors a target for unscrupulous financial product salesmen.

While it is unlikely that another retirement savings option will encourage all non-savers to change their behavior, the myRA program does have the potential to act as a vehicle for beginning savers to develop better saving habits.  The program could be particularly helpful for workers without employer-sponsored plans, as they will be able to take advantage of the direct deposit feature as well as the low minimums.  Because the myRA program is being created by executive order, it is necessarily limited, but if the plan rollout is successful it might pave the way for future government-sponsored savings programs.  MyRA accounts may not be the optimal tool for retirement savings, but there are reasons to believe that it might provide a step in the right direction for many workers looking to build a nest egg.

 

References
1. The final details of the program are scheduled to be completed by the end of 2014, so it is entirely possible that the finalized program will be different then has been described thus far.

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About Ethan Broga

Ethan is head of the Financial Planning Committee which oversees the development and expertise of Empirical’s financial planning recommendations. He holds an M.S. in financial planning and is a Certified Financial Planner®.

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