After President Obama's State of the Union address this past week, there has been quite a buzz about "myRA" accounts. More details were released in a press release from the White House the following day. But, with 401(k)'s, 403(b)'s, and IRA's already in existence, why do we need another retirement savings vehicle?
In simple terms, the myRA is essentially a Roth IRA offered by an employer that has very low initial investment requirements and where the principal is guaranteed. Here's how it would work in practice: an employer that does not currently have a plan in place can offer a myRA to their employees. The employees make after-tax contributions to the account, as low as $5 to $25. These contributions are deposited to the same government securities investment fund that only federal employees had access to before, meaning the principal is backed by the US Treasury. The employer has no cost because they will not administer or contribute to the accounts.
Married couples making up to $191,000/year and single individuals making up to $129,000/year can contribute to a myRA account. Fittingly, these are the same income limits to make contributions to a Roth IRA for 2014. Another catch is that the account only exists for a finite amount of time - the earlier of when contributions reach $15,000, or 30 years. Once these are reached, the account holder will be required to roll their money to a "private sector retirement account", i.e. a real IRA.
The pros of this approach are 1) employees that work somewhere without a retirement plan now will have an option, 2) contributions are guaranteed by the US government, which eliminates the majority of the investment risk, and 3) with very low initial investments, people in middle and lower income brackets will find it easier to participate. The cons are, well, only one: the 1-year return on the government securities investment fund last year was 1.47%.
The President has urged the Treasury to start making these accounts available to the public by December 31, 2014.