If you’ve read my posts on traditional IRAs or Roth IRAs you may have walked away a bit confused. That’s ok. Retirement accounts are a confusing topic for the majority of Americans. The U.S. Treasury picked up on this intimidating complexity and has very recently released a simple alternative for those wishing to save for retirement. This new type of account is called a MyRA. Let’s explore this new invention a bit further.
- A MyRA is a starter retirement savings account that enables those with low income or those new to investing to begin saving for retirement.
- The benefits of of the MyRA include near guaranteed appreciation, account is linked to you, no related fees, and simplicity
- The limitations of the MyRA include max contribution limits, limited returns
- The MyRa is best for those earning low income, or someone just starting to save for retirement.
What is a MyRA Account?
A MyRA account is a specialized Roth IRA account that invests and holds only United States Treasury retirement savings bonds. These savings bonds are backed by the full faith and credit of the U.S. Treasury meaning unless the U.S. government defaults on its debt, you have a riskless investment. In addition the MyRA is relatively simple to set up and has no fees or costs associated with its operations. The MyRA account is best suited for those who do not currently have access to an employee sponsored retirement plan (such as a 401k or IRA) or those who currently have low income employment.
Benefits of a MyRA Account
1. Guaranteed Risk Free Appreciation: Arguably the best part of the myRA is that you have risk-free appreciation. This means that there is no risk you will lose value in your investment.* When you invest these funds into the MyRA account, the U.S. Treasury then invests these funds in United States Treasury bonds. The average annual return over the past ten years has been 3.19%. A good assumption when calculating future returns would be to err on the side of pessimism and predict an annual return of 2.5% ( Which is much more than the 0.5% most people earn on savings accounts in banks). Though this return may barely outpace inflation, a 2.5% return is better than a 0% return or a 0.5% you would earn in a standard bank savings account.
*Assuming the U.S. Treasury does not default on its debt.
2. The MyRA is Tied to You: Most retirement plans are employer sponsored (meaning that your employer manages most of the account and may match your contributions) and thus are attached to that employer. This is not the case for the MyRA. A better way to think of the MyRA is that instead of being attached to your employer, it is attached to you. What this means is that should you change jobs and get a new employer, it is very simple to have this new employer direct funds to the MyRA for you. Another option is to set up a recurring or one-time contribution from a checking or savings account. This added flexibility makes the MyRA great for younger adults or those who are switch
ing jobs or locations frequently.
3. Simple Setup: Set up for these accounts are free and can be completed in a few minutes. The simple setup is on myRA.gov, clicking the “Sign Up” option, and going through the step by step process. The instructions are pretty straight forward and you will have a functional retirement account setup pretty quickly.
4. No Associated Fees or Minimum Balance Required: From a cost perspective the MyRA is a great choice. There are no maintenance fees (fees for a third party to handle the account) and no penalty for contributing too little funds or having a low balance in the account. As the investor you have total control over how much or how little you wish to contribute.
Limitations of a MyRA Account
1. Contribution limits: Similar to the Roth or Traditional IRA the MyRA has a annual contribution limitation. The max contributions to all IRAs combined cannot exceed $5,500 ($6,500 if age 50 or older). The example below illustrates what this could look like.
Ex. Let’s assume I have three IRAs, a traditional IRA ,a Roth IRA and a MyRA. In 2015 I contribute $2,000 to my Roth IRA and $3,000 to my MyRA. How much could I contribute to my traditional IRA?
$5,500 – $2,000 – $3,000 = $500
Thus I could contribute $500 to the traditional IRA without going over the contribution limit.
2. Max Value Limitations: As the MyRA is designed to be a “starter” retirement account, there is a limitation on the max value the account can reach. Once an account reaches $15,000 in total value (principal + interest earned), the account must be transferred to a private sector Roth IRA. Before this point is reached the investor is contacted and informed how to transfer the funds to a private sector Roth IRA where the principal and interest can continue to compound.
3. Interest Withdrawal Limitations: The MyRA does have a strikingly similar limitation to the Roth IRA in the way of withdrawal. At any point you may withdraw the money you personally invested into the account with no penalty. However, the withdrawal of the interest earned can be taxed if it is not distributed in a qualified distribution. A qualified distribution is only allowed after five years of the first contribution and you are 59 ½ years old or meet certain criteria (buying a first home). The purpose of this is to encourage savers to treat the account as an account for retirement and thus save for the age of retirement.
Ex. Let’s assume December 2015 I contribute $1,000 to a MyRA account. The account earned a 3.00% return over the year and thus the account is now worth a combined $1,030. At December 2016 I can withdraw any to all of the $1,000 I personally contributed. However if I withdraw the $30 earned in interest, the $30 will be subjected to additional taxation.
$1,000 * (1+3%) = $1,030
4. Limited Returns: The final limitation of the MyRA is related to one of my initial lessons on risk and return. The risk of the MyRA is close to zero. As a result the return on the investment should be relatively stable and low around 3.00%. Though this may not seem like a great return, it does beat inflation and is a higher return than most bank savings accounts.
How To Get a MyRA Started
If you are a young or low income earning individual who wants to start saving for retirement and currently has no retirement savings plan with your employer, the MyRA is the retirement account for you.
To get started go to MyRA.gov, click the “Sign Up” button, and be on your way to building your
- MyRA: A specialized type of Roth IRA with features designed for those new to saving for retirement.
- Maintenance Fees: Fees charged by an account manager for handling an account.