Retirement, for many American workers, is so far off in the future and so far behind other, more immediate priorities that their savings are, well, nonexistent. In an age where employer pensions are vanishing every day and Social Security may not provide all the income a retiree needs, individual savings are key to making it through the golden years. Though many folks have 401(k) or IRA accounts, many more don’t.
Enter a new plan. Last night in his State of the Union address, President Obama announced a new retirement savings plan called MyRA. This afternoon, he signed the order instructing Secretary of the Treasury Jack Lew to make it happen. But what is MyRA, how is it different from other IRA plans, and how might it affect your retirement planning?
First, what we already have on the books: the traditional IRA and Roth IRA are both personal retirement savings investment accounts. The main difference between the two is when and how you have to pay taxes on the money. The IRS definitions and regulations are dense to say the least.
The gist of both, though, is that they are individual investment accounts with varying tax benefits. How that breaks down:
- Individual-owned: Where a 401(k) is an employer-sponsored plan, just about anyone with a sufficient income and the cash to start with can go to a bank or investment house and open an IRA.
- Investments: Both a traditional and Roth IRA are, like a 401(k), accounts where the money in them is not only saved, but invested. Depending on whether the IRA is opened with a bank or with a brokerage firm, the investments might be in CDs, mutual funds, other stocks, or even something like real estate.
- Tax time: In a traditional IRA, contributions to the account are tax-deductible but one must pay income tax when withdrawing the money. In a Roth IRA, contributions to the account are not tax-deductible but withdrawals from the account are not taxable income.
- It takes money to make money: Annual contributions are capped, but one individual can own multiple accounts. In 2014, the maximum contribution to either a Traditional or Roth IRA for a person under 50 is around $5500; it’s higher for the 50-and-ups who are closer to retirement. Think of the return on $5000 per year over 30 years, and that’s a pretty penny.
MyRA has a different target audience. The program is designed to be accessible to workers not generally considered part of the “investor class,” and to help kickstart retirement planning among low-wage earners who generally do not have access to employer-sponsored plans (either pensions or a 401(k)).
The plan will be open to households making $191,000 or less annually. Workers can save up to $15,000 in the plan over a period of 30 years before having to roll their savings over to a Roth IRA.
The MyRA is not an investment account in the same way other IRAs are. Instead, it’s more like a structured way to buy savings bonds. In remarks the President delivered in Pennsylvania on Wednesday afternoon, he elaborated on some of the plan’s key features:
- Employer-connected: A MyRA is opened via an employer, and employees contribute via automatic paycheck deduction each pay period.
- Stability: A MyRA plan is essentially a savings bond: it can’t lose value, and it increases slowly over time. So unlike an investment plan, $50 you put in will always be worth at least $50 and, over time, will earn extra. The rate of return is a variable interest rate matching the Thrift Savings Plan (TSP) Government Securities Investment Fund, which is a retirement account program available to federal employees.
- Affordability/Accessibility: A MyRA can be opened with a $25 minimum deposit to start the account and future contributions can be as low as $5.
- Portability: A MyRA, though opened through an employer, travels with the employee when she or he changes jobs.
- No penalties: The money an individual saves in a MyRA can be withdrawn at any time–without an age or other requirement–without paying a penalty. Like a Roth IRA, withdrawals from a MyRA are also not considered taxable income.
Plenty of details, however, are still up in the air. The Chicago Tribune reports that 30 different money-management firms are in the running to manage the plan when it launches.
The time frame for that launch is also unclear. Businesses will need to sign up for the pilot program by the end of the year for their employees to be able to participate, but there is as yet no timetable for when that pilot program might begin.
Will a MyRA be right for you when the program finally gets off the ground? It’s too early to tell. In the meantime, it’s never too early to think about your own retirement savings.
Treasury to pick manager for Obama myRA retirement program [Chicago Tribune]