MLR

MyRA: How the new IRA works

If you listened to the State of the Union address last month, you heard President Obama unveil a new type of retirement savings plan called “myRA.”

IRA with money

MyRA is a savings vehicle designed to serve people whose employers do not provide access to a retirement plan. The best estimate is that about half of all workers and 75 percent of all part-time workers are in this category.

Here are the details released to date:

  • MyRAs will be backed by a security that looks and feels like a savings bond.
  • The government will back them with the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan.
  • Savers will be guaranteed that the value of their accounts will never go down.
  • Savers will pay no fees on the accounts.
  • Savers can open the accounts for as little as $25 and can make additional contributions in amounts as small as $5.

The myRA will use after-tax dollars, like a Roth IRA, and withdrawals under most circumstances will not be taxed. While it is funded by paycheck deductions, savers will be able to keep their accounts when they change jobs.

Although the program can begin without legislative approval, employers will not be required to participate. Congressional approval is required to force employers who do not have retirement accounts to set up payroll withholding procedures for myRA.

The myRA program has a $15,000 limit. After reaching that mark, savers will have to move their dollars to a Roth IRA.

Even if you qualify for myRA, you may wish to consider a Roth IRA as an alternative. Both Roth IRAs and myRAs are expected to have the same income limits on contributions.

If you decide to open a Roth IRA, you should shop for a custodian that charges no fees. You will not be subject to the savings limits, and you will not have to wait for your employer to agree to participate.

With a Roth IRA, you may not be able to set up an account with contribution thresholds as low as the $25/$5 amounts available with myRA. However, you can probably approximate the “safety of principal”aspect of myRA by investing exclusively in government bonds.