President Obama announced a retirement savings program for lower-income workers during Tuesday’s State of the Union address.
It’s called MyRA and is an idea that has been kicking around for a while, though not everyone, even Obama, is certain how to pronounce it (he stumbled when introducing it).
Here’s a rundown on what MyRA is all about:
Q: Why another retirement plan?
A: The new savings accounts are an attempt to allay a looming crisis for the millions of Americans who have no retirement plans at work. Although half of working Americans have 401(k)s or other plans, the other half have nothing through their workplace.
Q: How much can I contribute?
A: With a MyRA, people would be able to save small amounts at a time, like $25, and as much as $5,500 in a year. Once the account hits $15,000, participants could move their money into a regular Roth IRA and invest in mutual funds.
Q: What happens to my money? What am I actually investing in?
A: There are no investment choices. A person would invest in a security, like a government bond, that is similar to those offered to government employees through the Government Securities Investment Fund. It carries low interest rates that will vary over time but will be backed by the U.S. government.
Think of it as a U.S. government bond. You won’t lose money, but you won’t build up your savings quickly, because the interest rate will be low – it was less than 3 percent a year on average over the five-year period ending 2012.
Q: What about taxes?
A: A person would get no tax break for investing in these MyRAs. While the money stays in the fund, it won’t be taxed.
Once the account gets to $15,000, you will have the option of moving the money out of the safe, low-interest securities and into mutual funds within a typical Roth IRA. The money in the Roth IRA would continue to build without being taxed. Once you reach 59½, you could withdraw the money without incurring a tax.
Q: How is it different from an individual retirement account, 401(k) or Roth IRA?
A: As noted, the interest rate will be low. Your employer will make these available at your workplace but won’t have responsibility for them. They will be run by the government. Also, employers won’t provide any matching contribution.
Q: Should I invest in this before I put money in other types of accounts?
A: If your employer doesn’t offer a 401(k)-type account, you may want to consider opening a Roth IRA with a mutual fund company or a discount broker like Schwab or Fidelity.
The Roth IRA holds an advantage over MyRA because you can invest in mutual funds called target date funds that invest in stocks and bonds. They will increase your chance of ending up at retirement with enough money.
Although your money in a MyRA will be safe, you will never earn enough to provide for a decent retirement. That said, MyRAs are perfect for people who can save only small amounts. Most mutual funds won’t let you get started without about $1,000.
Q: Where can I get more information?
A: The Federal Retirement Thrift Investment Board already offers employees plans like MyRA, so you can get a sense of the future there.
There is no urgency to move on this now. The government will test the new idea at a few employers this year before launching it for everyone.
In the meantime, if you can save, consider opening a Roth IRA and start building up money.