MyRA May Not Be YOUR RA
by P.J. DiNuzzo November 12, 2015
MyRA May Not Be YOUR RA
Suppose somebody offered you a choice between two cars. The first car was identical to the second car, with one exception: it would only travel at a constant speed of 30 miles an hour. In the other car, you could choose to travel at any legal speed, and quite a number of illegal ones. Meanwhile you can only buy the one-speed car if you make less than a certain threshold income, and eventually, if you drive enough miles in the one-speed car, you'd have to buy the car that can travel at any reasonable speed anyway.
Which car would you choose?
That's the interesting choice posed by a new retirement account that was launched on Wednesday. In his 2014 State of the Union address, President Obama announced that he was directing the U.S. Treasury Department to create a new retirement savings initiative: the myRA, officially named My Retirement Account. This week, the first retirement savers will put the first dollars into the program.
The myRA is basically a government-sponsored Roth IRA with the same contribution limits ($5,500 a year, or $6,500 for those 50-and-older). Like the Roth IRA, all myRA contributions will be made after-tax (in other words, no deductions for the contributions), but the money will come out tax-free when the taxpayer reaches age 59 1/2. However, unlike the Roth, where the money can be invested in zillions of possible combinations of thousands of mutual funds, ETFs and individual stocks, the myRA participant has exactly one investment option: the government's Securities Fund for federal employers, which earned 2.31% last year.
Moreover, there are limitations on who can participate in the myRA. Only people with no 401(k) or 403(b) retirement plans at work can make myRA contributions, and even then, only those with an adjusted gross income less than $131,000 a year ($193,000 for couples). Also: once you've accumulated the maximum myRA balance of $15,000, you have to move the money over to a private-sector Roth IRA. The only benefit: the myRA doesn't come with any custodial or account fees, but those are typically nominal when you open a private sector Roth IRA.
So why would people contribute to a retirement option that is identical to a Roth IRA, but with roughly a zillion fewer investment options? It's possible that unsophisticated investors will appreciate the simplicity of the myRA solution, where, instead of having to decide where to invest, they simply lend their money to the federal government and collect the (modest) interest. The fact that the myRA account has no minimums could be attractive. Most private sector Roth's require at least $1,000 to be invested, but theoretically you could start your myRA with a penny.
It's also possible that the U.S. Treasury Department is about to discover that there's less demand for an inferior retirement plan than government economists had projected.
P.J. DiNuzzo, CPA, PFS®, AEP®, AIF®, MSTx, MBA
President, Founder, and Chief Investment Officer