Less than half of all Americans are adequately prepared for retirement. As of this year, 68% of America's workforce reported that they are not participating in an employer-sponsored plan. And that's what prompted the government to come up with the myRA.
The myRA is a new retirement savings plan that the Treasury Department recently rolled out for Americans who don't have a workplace retirement plan. But even though the myRA has some useful features, you should be aware of its limitations and some alternatives that may be better for you.
Pros and cons
The myRA is available to Americans who make less than $131,000 annually or couples making less than $193,000. The Treasury Department, which backs the plan, says the goal is to encourage people to start saving.
If you qualify for the plan, then you can contribute up to $5,500 per year, or $6,500 if you're 50 or older. It operates like a Roth IRA in that contributions are made with after-tax dollars, and interest is earned tax-free. However, there are a several differences between these two retirement savings accounts. A myRA account cannot be larger than $15,000, whereas no such limit exists with a Roth IRA. And while a Roth IRA allows you to choose a wide variety of investments including stocks, bonds, and mutual funds, the money contributed into a myRA is automatically invested in a savings bond that is issued and backed by the U.S. government. Contributions toward a myRA come in the form of payroll deductions, and if you change jobs, you can keep contributing to the same myRA without interruption. There are no setup costs involved and no minimum balance requirements. Initial myRA investments are set at $25 with subsequent contribution limits set at $5.
In addition, contributions can be withdrawn tax-free and without penalty at any time. You can only withdraw earned interest free of tax and penalty if you are at least 59-1/2 years old and made your first contribution at least five years ago. An exception to the early-withdrawal rule can be made for the purchase of your first home.
However, the myRA is designed only for smaller accounts, hence the $15,000 account maximum. Once the account balance reaches the maximum, or the account reaches 30 years of age, it will stop earning interest, and the designated account custodian, Comerica, will notify you that you need to transfer the balance into a Roth IRA at a private institution of your choosing. If you do not transfer your balance into a Roth IRA at this deadline, Comerica will close your account and hold your funds until you provide instructions for the required transfer.
Funds held in a myRA will earn the same interest rate as the Government Securities Fund, which has a 10-year average historical return of 3.19% as of 2014. The Government Securities Fund is a mutual fund that invests exclusively in U.S. government securities such as government bonds, Treasury bills, and Treasury notes. A 3.19% return is reasonable for an investment backed only by government-issued securities, but it's meager compared to the 10% average annual return of the S&P 500 index, which serves as a gauge the U.S. stock market. The myRA is ultimately more of a savings plan than a retirement plan, and it lacks the investment options of other IRAs or standard brokerage accounts.
It's better than nothing -- but worse than most
The myRA raises awareness of the importance of saving for retirement, but when it comes to contribution limits, potential rate of return, and the investment options available, it is too limited to serve as the vehicle for your retirement nest egg. As the Department of the Treasury states, the myRA is only meant to be a starter account for long-term retirement savings. The idea is that participants will graduate to IRAs and employer-sponsored retirement plans once they get their feet wet with the myRA.