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MyRA: What's In It For Us?

Contributed by mm | January 31, 2014 4:21 AM PST

Since he first announced myRA at Tuesday night's State of the Union speech, President Obama wasted no time in signing the executive order to make it happen the second morning, before he started his road trip to tour his newest idea. What is myRA?

Whitehouse's fact sheet gave more details. And a quick summary from WSJ's Damian Paletta explained the key points:

1.) The accounts would be aimed at workers whose employers do not offer traditional retirement accounts like 401(k)s.


2.) The accounts would function like a Roth IRA and have government backing like a savings bond. This would give the investments principal protection, meaning the account balance cannot go down.

3.) There will be an initial pilot program for companies that agree to enroll by the end of this year. Workers can invest if they make less than $191,000 a year.

4.) Businesses will not administer or run the accounts. They will simply offer them to their employees if they decide to participate.

5.) There will not be a tax penalty if the investments are withdrawn.

6.) Initial investments could begin at $25, and subsequent investments could be as low as $5. The idea is to have investments added through payroll deductions.

7.) Accounts can be taken by the employee from one job to the next, and they can be rolled into an Individual Retirement Account at any time.

8.) The accounts would have the same variable interest rate return as the Thrift Savings Plan Government Securities Investment Fund accounts that federal employees enroll in.

9.) Once someone’s account grows to $15,000, the myRA must be rolled over into a private-sector Roth IRA.

In my view, myRa is a pretty clever plan that might make a difference for three reasons:

First, it makes saving easier. Yes, today anyone can open an IRA account with $1,000 or even $500, but it does require some basic financial knowledge and extra effort to take this step and maintain it. By giving incentive to employers to include it as an automatic payroll deduction option, it eases a lot of pain for employees to take the first step.

Second, it makes saving more likely. More than one research have proven that more savings will be possible thru payroll deduction before people have a chance to spend it.

Third, it makes saving safer. Money in myRA is invested in Thrift Savings Plan Government Securities Investment Fund, an ultra-safe investment option that yields better than almost all savings accounts available to the general public (it's 2013 return is 1.47%), and the Fund, by design, will never lose money. ("The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.")

On the last point though, the Government Securities Investment Fund's extreme safety comes at the expense of limited growth potential -- the fund's life time annualized return is only 5.69% since April 1987. Yes, myRA comes with the feature to force savers to roll over the account to IRA when the balance exceeds $15,000, but it's arguable whether it is a blessing or not to deprive those "starter" savers of the learning opportunity of investing in riskier but more long-term-rewarding investment vehicles like stock funds or ETFs. In fact, points can be made that if one wants to learn investing, it's better to learn and pay for the mistakes when one's portfolio is still small.

What's your take on myRA?

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