In his January 2014 State of the Union address, President Obama instructed the Treasury Department to develop a new savings vehicle called “myRA.” The new savings arrangements share many similarities with Roth IRAs but also have some unique features. At press time, the Treasury Department is expected to roll out myRAs before year-end 2014. Certain details on how they will operate continue to unfold.
Saving for retirement
In his address, President Obama cautioned that Social Security, by itself, is often not enough to meet the financial needs of retirement. Many Americans participate in retirement savings arrangements, such as 401(k) plans, but many do not. President Obama subsequently issued an executive order directing the Treasury department to create a new retirement savings arrangement-myRA-that would protect the principal contributed while earning interest at a rate based on yields on outstanding Treasury securities. The President also instructed Treasury to develop and launch myRAs before 2015.
myRAs will be offered by automatic payroll deduction and will be portable. That means the accounts will not be tied to a single employer. However, employers must choose to offer myRAs to their employees. The White House is hoping that the ease of setting up these accounts will encourage employers, especially small employers, to offer myRAs to their employees.
After Treasury launches myRAs, employees of participating employers will be able to sign up to participate in the accounts. Employees will be able to enroll in the program with a minimum contribution of $25. An employee can then elect to have a portion of each paycheck (as little as $5) directly deposited into a myRA automatically. Employers will not contribute to myRAs.
The Treasury Department has posted some basic information about myRAs. Account holders will be able to build savings for 30 years or until their myRA reaches $15,000, whichever comes first. After that, myRA balances will roll over to private-sector retirement accounts. Contributions to myRAs can be withdrawn tax-free at any time. Earnings will be tax-free unless withdrawn before the saver is age 59 ½.
Funds in a myRA will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan (TSP) available to employees of the federal government. TSP has explained that this fund invests exclusively in U.S. Treasury securities. The earnings consist entirely of interest income on the securities. TSP has acknowledged that this fund is subject to inflation risk, or the possibility that the investment will not grow enough to offset the reduction in purchasing power that results from inflation. This is one concern that some financial advisors have raised about myRAs.
More details expected
The Treasury Department is expected to issue rules and regulations for myRAs just as it has for IRAs, Roth IRAs and other retirement savings vehicles. Several questions are expected to be answered in the guidance, such as how rollover of funds in myRAs will work. The Treasury Department also is expected to describe in greater detail the income qualifications. At this time, Obama administration officials have indicated that myRAs will be available to individuals with annual incomes of less than $129,000 a year and $191,000 for couples. These amounts are expected to be adjusted annually for inflation.
As discussed above, more details about myRAs will be available as 2014 unfolds. Obama administration officials have described myRAs as “starter savings accounts” and in many respects, myRAs may be most attractive to individuals just starting out in the workforce. However, myRAs also could be part of the retirement savings portfolio of individuals who have been in the workforce longer.
If you have any questions about myRAs, please contact our office at (908) 725-4414. We will keep you posted of developments.