How many of you managed to catch the State of The Union address last night? I happened to catch the last 30 minutes or so of the speech and my ears perked up at President Obama’s mention of a “myRA”. He intends to issue an executive order to create a new retirement account vehicle for people to use. The speech was light on details, and unfortunately so was the press briefing/details issued at the time. Thankfully the White House gave more details today. So what is a myRA?
A Quick Overview
This is a new type of account for workers to use to save for retirement. It requires employer participation, which is free. Employers may sign up for the pilot program by the end of the year for employees to have the option to participate.
The income limit for this account would be $191,000, so anyone making less than that is eligible (assuming their employer is participating).
The contribution limit is $15,000 for the lifetime of the account, and employees may make contributions for up to 30 years. Employees can transfer/rollover the account to a private Roth IRA.
Initial investments/deposits may be as low as $25, and contributions can be made through payroll deductions. Contributions minimums are $5.
Holdings would be backed by government savings bonds, and investors would earn a low variable interest rate equal to the TSP (Thrift Savings Plan) available to federal employees.
Given that they plan to allow people to roll their balances over to Roth IRAs, let’s assume that the account will share the same sort of tax benefits: contributions are made after taxes, but gains are tax free. This also may mean that we can withdraw contributions without any tax penalties.
It’s About Getting Started and Safety
The aim for this program is to allow lower wage workers or beginning savers to get started. That’s why there’s a focus on: small initial investment deposits, small contribution minimums, a lifetime contribution cap (rather than yearly), and a low rate but principal protected investment. You won’t make big returns investing in these accounts, but you can know that there is no risk of any losses either. Paired with Roth IRA style contribution withdrawal rules this can effectively operate as a very safe investment vehicle for workers – possibly even as an emergency fund (though, I’m assuming if you withdraw contributions that because of the lifetime contribution cap you wouldn’t be able to put that money back in again!).