myRA is part of the government's effort to address the lack of savings in our country and the high reliance on Social Security. But how worthwhile is this new retirement account option?
A new type of retirement account has been introduced by the government, recently. It is called myRA and is a part of the government’s slow but continued efforts to address the lack of savings in our country and the reliance on Social Security, which is a huge looming issue as the Baby Boomers continue to exit the working world.
According to a recent study by Fidelity Funds, the nation’s largest 401(k) provider, the average 401(k) balance is a whopping $83,400 and for those over the age of 55 the average was just $269,500.
The myRA is going to be an option that is targeting low- to middle-income earners who do not currently have an employer-sponsored plan, but will be an option for all workers even if they do already have other employer options like a 401(k) or 403(b). The plan will be able to have direct payroll deductions into this new investment vehicle for companies that sign up for the pilot program by the end of 2014.
Like most current Individual Retirement Account (IRA) programs, there will be a household income limitation, which is proposed to allow folks who are married filing at $191,000 and below to participate. The account will also be limited to a total of $5,500 of contributions per year as well.
The myRA will function very similarly to a Roth IRA. The investor will not gain a current year tax deduction off of their income, but the money will grow tax deferred and the entire account can be pulled out tax-free. Participants will be allowed to withdraw contributions penalty free like a Roth IRA as well.
This is where I feel the major drawback of the plan lies. Unlike other IRA plans, this investment vehicle is restrictive on what actual investments are allowed inside of it.
The myRA will only allow the purchase of government savings bonds. The upside to this, in the creators’ minds, is that this is a safe investment that all but assures the preservation of principal.
Although any savings is good savings at its base, the conservative nature of these accounts make it harder for these accounts to gain some steam on their own and enjoy one of Einstein’s wonders of the world—compound interest! These government bonds are traditionally low yielding in response to its low risk and may not be helped by our Rule of 72. (See Doubling Your Investment with the Rule of 72)
Overall, I applaud the additional option and increased effort to address long-term savings, but feel it is just a lower quality Roth that is slightly easier to enroll in.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC.
CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. 815755/ DOFU 02-2014.