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What is the myRA Retirement Savings Account?

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On January 28, 2014, US President Barack Obama announced myRA, a US Treasury retirement account intended for workers without employer-sponsored retirement plans. myRA will roll out to US workers in 2014. If you don't have a pension or 401(k) plan through your company, you may be eligible to enroll in myRA.

What is the myRA Retirement Account?

The myRA is a new variant of the Roth IRA—an individual retirement account. It has several interesting features.

You can start a myRA plan with as little as $25. You can contribute a tiny amount of money from every paycheck—as little as $2 (and, at most, $5500 per year). As with a Roth IRA, these contributions are deducted from your paycheck after you pay taxes, so you won't owe any taxes on qualified withdrawals. In other words, everything you earn in this account will be tax-free.

You're eligible to contribute to myRA if you meet the Roth IRA contribution guidelines: if you file as an individual and report less than $129,000 of annual income or if you file as a household and report less than $191,000 of annual income.

Unlike a Roth IRA, your contributions are insured and guaranteed by the US Government, so you'll never lose them. They're like savings bonds in this respect. There are also no fees for participating. Furthermore, myRA must be offered by an employer, but is not tied to an employer, so you can transfer it between employers when you change jobs—without penalty.

In your myRA account, you'll earn the same interest rate as investors in the Thrift Savings Plan or the Government Securities Investment Fund. (1.47% in 2012, but 3.39% average annual return from December 2003 until December 2013.) When you've accrued $15,000 in the account or have had the account for 30 years, it rolls over into a private account. There is no penalty for withdrawing the principal—your contributions—at any time. After age 59 1/2, there's no penalty for withdrawing your contributions and your earnings. Remember, you won't pay taxes on it either.

For this program to work, employers must fill out some paperwork. The burden is not onerous; it exists mostly to arrange for payroll deductions.

Why does myRA Exist?

The intent of the myRA program appears to be to remove as many barriers between workers and saving for retirement as possible. While employers do need to sign up to offer myRA to their employees, the lack of fees and guaranteed return and insured principal and low entry and contribution costs make this plan very affordable for most workers.

If you save $275 ($25 to start the account and $5 a week) the first year, get an average return of 3%, and keep that money in there for 35 years, you'll end up with $750. That's not a lot of money, but if you've never saved anything for retirement, it's a start. Ideally you can contribute more (and your employer will offer more retirement funds).

If you save $275 ($25 to start the account and $5 a week) the first year, add $250 every year for 35 years, and get an average return of 3%, you'll end up with $15,000—which isn't bad at all. Keep in mind you won't have to pay taxes for any of that. (After 30 years you'll have to roll it over into a private account, but by that point the goal is for you to know more about how to manage your own investment. You may pay a little more in fees, but you'll be able to invest in many other options.)

Who is myRA Good For?

myRA is very good for young workers. It's a cheap and easy way to get them in the habit of setting aside a little from every paycheck toward their retirements. A 20 year old could get a head start on a nice little nest egg even if he or she doesn't have a real career yet.

myRA is good for low income workers who can contribute even $5, post-tax, from every paycheck. (An increase in the minimum wage will only help that.) A return of 3% annually won't make anyone rich, but having some money set aside and growing (tax-free) is better than having none.

myRA is no replacement for a self-directed Roth IRA. You can get much better returns than the Thrift Savings Plan rates, if you're willing to take on more risk. You can get similar tax-free benefits with a standard Roth IRA, and you can invest in municipal bonds for nearly the same safety.

myRA isn't good for Wall Street brokers who charge big fees, because there aren't any fees. There's little work to set up this program and keep it going, and there's little churn to charge you money. (Some people argue that Wall Street isn't interested in $250 a year from several million people, but Wall Street is always interested in money).

Should Employers Offer myRA to Employees

Suppose you're an employer. Should you sign up for the myRA program?

Yes. There's no downside for you beyond managing a little extra paperwork, and you'll be helping your employees take better control of their own finances. There's no risk to you.

Should You Open a myRA?

There's an idealism to this program, one which believes it's in the long-term interest of the US to encourage people to save more for their futures. Social Security payroll withholding does support a safety net for seniors, but it's unlikely that Social Security will provide today's workers with the standard of living they'd like when they begin to retire.

For more specific details about your own situation, the myRA home page has a calculator for you to use to try different contribution scenarios.

It's not a big program. It's not a complex program. It's a little program—but it's a little program with few downsides and a few advantages targeted at people who need them.

You may not be ready to manage your own stocks (or even buy and hold a simple but valuable index fund) yet or ever, but if you can commit to saving even $5 a paycheck in myRA, you'll have taken an important step on your path to financial knowledge and independence—and you deserve full credit for doing so.