BY RICH WHITE
About a year ago, President Barack Obama authorized the U.S. Treasury to create a new type of workplace retirement plan, a mini-Roth IRA account called myRA. On December 15, Treasury’s final regulations became effective.
myRAs are expected to be available through many custodians starting in 2015.
Although myRAs won’t set the financial world afire due to built-in limits, they have a place in retirement planning, as guaranteed (can’t-lose-principal) starter plans for young people. Their tax-free interest rates may not be bad over time, either. In fact, they should beat just about any taxable CD rate currently available.
The biggest regulatory limit is that a myRA balance can’t exceed $15,000, including accrued interest. Also, the maximum length of participation is 30 years. At any time, participants can cash out or transfer balances to another account, tax-free and penalty-free. Either a cash-out or transfer will be required at the earliest of the $15,000 balance limit or 30-year limit.
myRA’s will be invested in a new type of nonmarketable retirement savings bond that pays the same rate of interest as the Government Investment Fund (G-Fund) of the Federal Thrift Savings Plan. This rate resets monthly based on the weighted average yield of all outstanding Treasuries with maturities of four years or more. The weighted average maturity is approximately 10 years, so currently it is paying about 2.3%. However, the fund will quickly mirror any uptick in Treasury rates. Since the G-fund’s inception in 1987, it has averaged an annualized return of 5.93%. Like the G-Fund, myRAs guarantee against loss of principal.
Originally, myRAs were touted as workplace savings programs, but the final regs do not require participants to work for a company that authorizes them. Also, there is no minimum age requirement. So, potentially they become a viable way to seed future retirement plans for young people – for example, by contributing $1,000 per year over the next 14 years. At that point, with accrued tax-free interest, the young person might have about a $15,000 head start on a personal retirement savings program of his/her choice, or any other type of financial program, such as permanent life insurance.
Regular Roth IRA contribution rules and MAGI limits apply, so myRA contributions may not exceed the account owner’s earned income each year. A teenager who earns $1,000 per year mowing lawns and files an income tax return could be named owner of the $1,000-per-year plan described above. More realistically, perhaps, myRAs are a way for employed people in their 20s to experience retirement plan participation and asset accumulation without investment risk, taxes or penalties. They definitely beat no plan participation at all.