We know about traditional IRAs and Roth-IRAs, but what is a myRA? myRA is a new government-backed retirement account. Last year, President Obama asked the United States Department of Treasury to create a new form of retirement account that could be used as a “starter” account for low and middle-income Americans who don’t have access to employer-sponsored retirement plans.
The program is not really designed to be your only form of retirement account, but a stepping stone towards start saving for retirement.
How Does myRA Work?
myRA works in a similar fashion as a Roth-IRA in which all contributions are made after taxes, and withdrawals are tax free. Contributions are invested in a United States Treasury security, which means you never lose your contributions. The U.S. Treasury security earns interest at the same variable rate as the Thrift Savings Plan‘s (TSP) Government Securities Investment Fund.
This is a safe way to save for retirement, but it also means that the rewards are low. The average annual rate of return for this fund over the ten year period of December 2003 and December 2013 was 3.39%.
These returns are better than having your money in a savings account, but not better than investing in index mutual funds. However, you can lose your money investing in index mutual funds, which is not the case when investing in TSPs.
Who Can Enroll In myRA?
Anybody who doesn’t have an employer-sponsored retirement plan, has a taxable compensation, and has direct deposit from their employer can enroll in myRA. It doesn’t matter if you are full-time, part-time, or contract employee.
How Much Can You Contribute?
Individuals can open an account with as little as $25 and can contribute as low as $5 at a time through automatic payroll deduction. This is great because Vanguard – my favorite – requires a minimum of $3,000 to open a Roth-IRA, and this might not be feasible for everyone.
Just like the Roth-IRA, there is a contribution limit of $5,500 per year or $6,500 per year for people over 50 years old. There is also an income eligibility: individuals must have an annual income of less than $129,000, and $191,000 for married couples filing jointly.
The myRA accounts can have a maximum balance of $15,000. Once you hit that mark, you have to roll it over to a private-sector Roth-IRA. The fund will also have to be rolled over once it is 30 years old.
What About The Fees?
One of the best things about the myRA is that it has no fees. It doesn’t have any start-up cost, annual fees, and it doesn’t have minimum contribution requirements.
Is myRA The Best Option?
myRA is a great option for those who don’t have a retirement plan though their employer and don’t have enough savings to open a Roth-IRA.
I think myRA is a great starting point, but I still think a regular Roth-IRA is the best option. The myRA plan will force you to rollover your contributions to a traditional IRA or a Roth once you hit $15,000 anyways, but I would roll it over to a Roth as soon as I save up the $3,000 necessary to open a Roth-IRA account with Vanguard.
Vanguard index funds have fees, but they are one of the lowest (if not THE lowest) fees of any fund I’ve seen. And you have a lot more options on where to invest your money.
Government bonds are guaranteed and super safe, but the returns are pretty low. I would rather take a little bit of a risk to be ahead of inflation. Not too big of a risk though… let’s not get crazy. Stick to index mutual funds and you should be fine.
myRA will not help you retire comfortably – $15,000 is not nearly enough – but it is an option you now have to start saving towards retirement.
What do you think of myRA?