President Obama announced a major change to the way some Americans plan for retirement when he introduced the myRA retirement plan during his recent State of the Union address.
We didn’t find out much about the details of myRA during the State of the Union speech itself but the White House later released a fact sheet providing some of the important specifics.
In the State of the Union address, President Obama referred to myRA as a plan similar to workplace 401k plans and Individual Retirement Accounts (or IRAs) and offering a “new way for working Americans to start their own retirement savings.”
How Does myRA Work?
The plan bears some similarity to the workplace 401k in the sense that is a payroll-deduction retirement vehicle.
The plan is voluntary and capped at $15,000. After a worker has accumulated $15,000 in their myRA or has been contributing for 30 years, they will be forced to roll it over to a private IRA account.
The most significant difference between existing IRA/401k plans and myRA is that myRA funds can only be invested in a mix of U.S. Treasury Bonds.
The minimum to open the account is only $25 and regular payroll deductions can be in increments as small as $5.
myIRA is clearly targeted towards lower income workers who don’t have access to a workplace 401k plan and lack the financial know-how to start and manage an IRA. But the plan is also available to workers earning as much as $191,000 per year.
The plan will be available to all employers as an option for their employees, but doesn’t appear to be mandatory at this time. Employers aren’t being asked to administer or contribute to the plans themselves, they only need to forward employee contributions to the Treasury Department.
Workers contribute funds on a Roth basis, meaning that their withdrawals in retirement will be tax-free but the worker will contribute after-tax dollars.
So, Is the Obama myRA a Bad Idea?
There are several key ways in which myRA is different than the retirement plans currently available.
For starters, participants can only invest their contributions in a mix of U.S. Treasury Bonds. This is actually identical to the Thrift Savings Plan available to government employees but this is the first time a similar savings vehicle will be available to the general population.
myIRA is also unique in the sense that after a worker has contributed for 30 years or has saved $15,000, they are forced to leave myRA and roll the funds over to a private Roth IRA. As such, this really is more of a starter-IRA than anything else. As a matter of fact, the White House refers to the plan as a “simple, safe and affordable starter savings account.”
Anything that gets millions of people to start saving for retirement has to be a good thing. Still, the plan isn’t perfect.
The major drawbacks are the limit of $15,000 and the fact that participants can only invest in Treasury Bonds, which offer little or no yield after inflation.
But the point of the program is to provide a means for millions of American workers to start saving for retirement. And in that respect, the plan could be wildly successful.
The myRA Treasury Bond investments offer safety and the low-minimum payroll deductions offer convenience and accessibility across a broad socioeconomic spectrum.
I’m curious what you think, is the Obama myRA a bad idea?
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