Early this year, President Obama instructed the Treasury Department to develop a new savings vehicle called “myRA.” These accounts are to share many similarities with Roth IRAs but also have unique features. myRAs are expected to roll out before year-end 2014 with details on how they operate to be forthcoming.
As we have been cautioned (and have come to know), Social Security is often not enough to meet the financial needs of retirement. Many Americans participate in retirement savings arrangements, such as 401(k) plans, but many others do not. Under executive order, the Treasury Department has been ordered to create a new retirement savings arrangement, myRA, that would protect the principal contributed while earning interest at a rate based on yields on outstanding Treasury securities before 2015.
myRAs will be offered by automatic payroll deduction and will be portable. That means the accounts will not be tied to a single employer. However, employers must choose to offer myRAs to their employees. The White House is hoping that the ease of setting up these accounts will encourage employers, especially small employers, to offer myRAs to their employees.
Once the program is launched, employees of participating employers will be able to sign up to participate in the accounts. Employees will be able to enroll in the program with a minimum contribution of $25. An employee can then elect to have a portion of each paycheck (as little as $5.00) directly deposited into a myRA automatically. These accounts are not intended for employer contributions.
Account holders will be able to build savings for 30 years or until their myRA reaches $15,000, whichever comes first. After that, myRA balances will roll over to private-sector retirement account. Contributions to myRAs can be withdrawn tax-free at any time. Earnings will be tax-free unless withdrawn before the saver is age 59 ½.
Funds in a myRA will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan (TSP) available to employees of the federal government. This fund invests exclusively in U.S. Treasury securities, which consists of earnings entirely on interest income. TSP has acknowledged that this fund is subject to inflation risk, or the possibility that the investment will not grow enough to offset the reduction in purchasing power that results from inflation. This is an important concern that has been raised about myRAs.
The Treasury Department is also expected to issue rules and regulations for myRAs soon. Several questions are expected to be answered in the guidance, such as how rollover of funds in myRAs will work. The Treasury Department also is expected to detail income qualifications. Initially, Obama administration officials indicated that myRAs will be available to individuals with annual incomes of less than $129,000 a year ($191,000 for couples), adjusted annually for inflation.
As discussed above, more details about myRAs will be available as 2014 unfolds. Obama administration officials have described myRAs as “starter savings accounts” and, in many respects, myRAs may be most attractive to individuals just starting out in the workforce. Retail and customer service employers are likely to have the greatest utilization of this new plan. However, myRAs also could be part of the retirement savings portfolio of individuals who work in different industries, and also individuals who have been in the workforce longer.
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