On January 29th, 2014, President Barack Obama signed a presidential memorandum authorizing the Treasury Department to create a new retirement-savings vehicle aimed at workers who don’t have access to traditional retirement accounts, such as 401(k)s. That group includes about half the U.S. workforce.
Called “MyRAs,” the accounts were among the proposals Mr. Obama unveiled during his State of the Union address. Below is a list of frequently asked questions and answers that will help to provide all plan sponsors with an initial overview of exactly what these “MyRAs” are, and how they may affect companies and employees.
Q: Who will be eligible to contribute?
A: Individuals who earn up to $129,000 and couples who earn up to $191,000 will be eligible – assuming their employers offer the accounts. (There is no requirement that employers do so.)
Q: Will I get tax benefits for contributing?
A: Yes. The new accounts will be structured like Roth IRAs, in which account holders contribute money after income taxes are paid, and any investment gains and withdrawals are tax-free. Roth IRA accounts—in contrast to traditional IRAs, which allow pretax contributions—make sense for the younger and lower-income workers the MyRA program is trying to reach. That’s because younger workers are likely to be in relatively low tax brackets today – and so they will get less benefit from the tax deductions available for contributions to a regular IRA.
Q: How much can I contribute?
A: You can contribute as little as $25 initially and $5 through subsequent payroll deductions. As with other IRAs, account owners can contribute a maximum of $5,500 a year (or $6,500 if they are 50 or older). Once an account’s balance reaches $15,000, participants will be required to roll the money over to an IRA at a private-sector financial services company.
Q: Can I contribute the full $5,500 a year to a MyRA, while also contributing the $5,500 maximum to another IRA?
A: No. Individuals can contribute a total of up to $5,500 to all of their IRAs, a category that includes the MyRA. As a result, if you were to contribute $3,000 this year to your regular IRA, you could contribute no more than $2,500 to a MyRA. Also, keep in mind that, depending on their income, some savers who have retirement plans at work may not be able to deduct their IRA contributions.
Q: If I amass $15,000 in a “MyRA” and roll the money to a private-sector IRA, can I start over with another “MyRA”?
A: No.
Q: What investment options will I be able to use in a MyRA?
A: The MyRA features just one investment option—a Treasury bond that will offer the same variable interest-rate return as the benefit federal employees get when they enroll in the Thrift Savings Plan Government Securities Investment Fund. While account holders cannot lose money on those investments, they are unlikely to receive high returns either. The TSP fund had an annual return of 1.47% in 2012, with an average annual return of 3.61% from 2003 through 2012. If interest rates rise, account owners will benefit, because interest rates on bond will re-set monthly.
Q: What if I want to take my money out?
A: You can pull your principal out any time. Earnings withdrawn before the account owner reaches age 59 ½ are subject to income taxes and a 10% early withdrawal penalty.
Q: If my employer offers a MyRA, do I have to contribute?
A: No. Participation is voluntary. If you do choose to participate, your employer will set up an automatic payroll deduction that will funnel money directly from your paycheck to your MyRA account.
Q: Will I have to pay fees for a MyRA account?
A: No.
Q: What will be the cost to employers?
A: It’s not entirely clear yet but it’s likely the accounts will impose little to no cost on employers. The federal government will cover the administrative expenses. Unlike with 401(k)s, there is no employer matching contribution. Nor will employers have the fiduciary liability they have with 401(k) plans.
Q: What types of companies are expected to participate in the pilot program that will be launched by year-end?
A: The Treasury Department has yet to release details, but says it is looking for a broad range of companies—small, medium-sized and large.
Q: What are the pros and cons of the “MyRA” vs. a traditional 401(k)?
A: With a MyRA, employees who switch jobs will be able to continue to fund the accounts, which will be held at a financial-services company the Treasury will select. Other advantages are that account owners pay no fees and their principal is protected.
Downsides include the likelihood of low returns, since there’s no option to invest in stocks or other higher-risk/higher reward securities, as well as the lack of an employer match. But some lower-income taxpayers will get a match of sorts from Uncle Sam: Individuals with adjusted gross incomes of up to $30,000 and couples earning up to $60,000 are eligible for a savers’ credit of 10% to 50% of their contributions, depending on their income.)
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with current regulations.
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