If the financial world had a mantra that applied to everyone, it could well be “Save enough for your retirement.”
Operating on that undisputable wisdom, the government sponsored a savings plan designed to get millennials to start putting money away for retirement — the myRA.
“The myRA was designed to encourage people who don't normally save for retirement to begin a habit of saving,” said Chris Carosa, chief contributing editor of FiduciaryNews.com. “It’s a very noble goal and is shared by all corporate plan sponsors and financial planners.”
But those planners say there are some downsides to weigh against other options available to young adults. As Pamela Yellen, author of “The Bank On Yourself Revolution,” noted, “It’s a government-approved and controlled plan. They can and do change the rules any time they want. And they always come with more strings attached than a puppet.”
Here’s an overview, strings and all.
myRA accounts first became available to the public via a 2014 pilot program at the direction of the Obama administration. Administered by the Treasury Department, myRA is essentially a version of the Roth IRA intended for those without a 401(k) or other workplace benefit to start saving for retirement — particularly young people new to the workforce.
The plan allows annual contributions up to $5,500 ($6,500 if you’re 50 or older) if your adjusted gross income is less than $116,000 for single filers or $183,000 if you’re married filing jointly. Contribution limits gradually phase out past those income levels. Similar to a Roth IRA, participants don’t receive a tax break for contributions, but can withdraw the contributions tax- and penalty-free at any age. Earnings may be withdrawn tax-free after age 59½ if the account has been in place for at least five years.
Here’s where myRA and a Roth IRA begin to part company. The choice of investment is limited to a newly created Treasury bond that delivers the same rate of return as the Government Securities Investment Fund (also known as the G Fund) currently available to federal employees. Although the return is guaranteed, as of December 2014, the G Fund average annual return was 3.19 percent over the prior 10 years. And it’s been dropping of late.
“At best, you’ll only keep up with inflation. And you won’t always do that,” said Yellen. “The G Fund has a current return of 1.47 percent, which is less than inflation.”
Another major difference is a limit on the total amount investors can put into a myRA. Lifetime contributions are capped at $15,000.
“That level of saving would do very little to close the sizable retirement savings gap,” said Robert Johnson, president and CEO of The American College.
Furthermore, once a myRA account hits the $15,000 mark, the money has to be rolled over to a private-sector Roth IRA administered by a brokerage firm, mutual fund company or bank. The same rollover requirement holds true if an investor has funds in a myRA account for 30 years.
Is it a good idea?
Given low rates of return and maximum contribution level, investors may wonder what the myRA has to offer, compared with other retirement savings options.
There are some positives. First is low cost. There are no custodial fees or transaction costs, no minimum contributions requirements, and the tax provisions of tax-free withdrawals after 59½ can be beneficial in some long-term scenarios.
“This is a good thing, if you believe tax rates will be going up over the long term,” said Yellen. “Although many people don’t think about this, if tax rates go up and you’re successful in growing a nest egg, by deferring your taxes, you’re only going to end up paying higher taxes on a bigger number.”
Lastly, even myRA skeptics acknowledge that saving anything, no matter the varied limitations, is better than nothing.
Despite the “better than nothing” admission, financial professionals are quick to point out alternatives to a myRA account.
The most obvious is an employee 401(k) (403b for public sector employees) savings plan. Not only are contribution limits more generous (401(k) contributions caps will stay at $18,000 annually in 2016) but a reasonably designed 401(k) plan will offer a greater range of investment choices with potentially greater long-term returns.
If you don’t have a retirement plan where you work, Carosa suggests opening a no-fee IRA account — with no investment minimums and with access to transaction fee-free mutual funds (TD Ameritrade offers these sorts of funds.)
If you like the tax provisions of myRA, such as tax-free withdrawals, there’s a Roth IRA of your own. You can do so even if you have a 401(k) or other retirement program where you work. However, you do have to meet certain income guidelines.
Exploring options to the myRA program can be particularly important for young people just entering the workplace and with a long timeframe with which to save for retirement (the demographic that myRAs are supposed to target to encourage savings.)
Although the “guaranteed” return from a myRA may be enticing, the low return simply cannot leverage the long time period to retirement as well as more aggressive choices — a point that even the most skittish of investors would do well to consider.
“The biggest risk to these safe investments is missing out on adequate earnings potential, especially during the most valuable compound interest years,” said Carosa. “While the advertised rate of 3 percent per year is far greater than similar fixed income requirements that offer little to no risk to your principal, long-term investors are generally not concerned with principal risk but with the risk of inadequate long-term growth.”