The government has just introduced its new retirement vehicle. This new vehicle is known as myRA. The new plan is geared towards low-income individuals who do not have access to a retirement plan through their employment. Like most government programs, there are pros and cons. The key for you is to decide is if this is a retirement program that you should pursue. First, let me go through the basics of this new program.
myRA is similar to a Roth IRA in the fact that you’re contributing after-tax money and all the income earned in the account grows tax free. In addition, the eligibility rules for myRA are the same as a Roth IRA. Those rules are that if you are single and you have less than $131,000 in income or if you’re married and your joint income is below $193,000, then you are eligible to make the contribution. If you are under 50, your contribution maximum is $5,500 and if you are 50 and over, you can contribute up to $6,500. Like in a Roth IRA, you can always withdraw your original contribution without penalty and the money is eligible to be rolled over into a Roth IRA.
What makes the myRA different than other retirement vehicles is that there is only one investment option within this plan. The entire contribution is invested into a U.S. treasury fund which is basically the same as the G Fund in the Government’s Thrift Savings Plan. Because the money is invested only in federally insured obligations, there is no risk of default. In addition, the myRA plan has no fees or commissions and there is no minimum to start the plan. Furthermore, you can contribute to this plan in a number of different ways such as, automatic withdrawals from your checking account or even a payroll deduction.
One other unique aspect of the myRA is the fact that if the account grows to over $15,000, the money must be transferred into a traditional Roth IRA through a mutual fund company or a brokerage house. In addition, the money in a myRA can be in the account for no longer than 30 years. After 30 years, the money also must be transferred.
The question that many people may have is whether this retirement vehicle makes sense for them. The pros obviously are the facts that there are no costs or fees, the money is guaranteed by the U.S. government, there is no minimum to start a plan and contributions can be withdrawn at any time. However, the plan does have its downside and to me it is the fact that there is only one investment option.
As I mentioned earlier, the investment option is based upon the yield of all outstanding U.S. treasuries with maturities greater than four years. In 2014, this investment returned 2.3 percent. Over the last 10 years the investment has averaged a little over three percent. My bottom line, these returns do not keep up with the increased cost of living. I believe that when it comes to investing, particularly for those who are investing for the long term, you have to have some equities in your portfolio. I recognize that the stock funds go up and down, but over the long run they perform much better than U.S. treasury obligations.
I would prefer that as opposed to investors using myRA, they look at a traditional Roth IRA offered by brokerage houses. Many companies such as TD Ameritrade, Fidelity and Schwab offer very low cost Roth IRAs. I believe opening a Roth IRA with a brokerage house or a mutual fund company where you have more investment options is one that most people should consider. However, for some who consider themselves a very conservative investor and who does not want any principle fluctuation in their portfolio, myRA is something that is worth considering. For those of you who want more information about myRA, a good place to go is the government’s official website at www.myRA.gov.
Whether it is using a Roth IRA, 401(k) Plan or myRA, the key is that everyone, no matter where you stand in the economic ladder, has to start thinking about their retirement. The government does not have the resources to protect us; we have to protect ourselves. Therefore, the sooner you can start saving for your retirement, the better you would be. Do I think you can do better than a myRA? Yes; however, myRA is much better than doing nothing.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.