Workplace savings plans survive the test of time

 

Work place savings plans, such as the 401(k) and 403(b), have proven to be highly successful in providing the best way for American workers to save for retirement.  They offer informative, cost effective means for employees to easily have money deducted from their pay on a regular basis and invested in a wide variety of options appropriate for them.  Not only that, but once enrolled, plan participants are amazingly adept at staying the course.  Regardless of what is happening in the U.S. or world economy or the stock market, they continue to contribute on a regular basis — laser focused on meeting their retirement needs …. It is either that or they just put everything on automatic pilot and leave it at that.  The bottom line is that they are good for the individual and society as a whole. 

 

What is this new myRA?

 

But what if your employer doesn’t offer a retirement savings plan?  Introducing the myRA.   President Obama recently introduced the myRA and dubbed it a starter savings account.  According to the White House, the myRA is a new type of savings account for Americans who don’t have access to an employer-sponsored retirement savings plan.  Workers who don’t opt out will be able to have a portion of their paycheck directly deposited into their myRA automatically every payday.  The key selling points are:

  •  Starter Savings Account: This new product will be targeted to the many Americans who currently lack access to workplace retirement savings plans.
  • Safe and Secure: Principal protection so savers’ account balance will never go down. The product will be offered via a familiar Roth IRA account, and savers will benefit from principal protection, so the account balance will never go down in value. The security in the account, like all savings bonds, will be backed by the U.S. government. Contributions can be withdrawn tax free at any time.
  • User-Friendly: Portable account with contributions that are voluntary, automatic, and small. Initial investments could be as low as $25 and contributions that are as low as $5 could be made through easy-to-use payroll deductions.  Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time. 
  • Widely Available: Available to millions of Americans through their employer. This saving opportunity would be available to the millions of low- and middle-income households earning up to $191,000 a year.  These accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014.  The accounts are little to no cost and easy for employers to use, since employers will neither administer the accounts nor contribute to them.   Participants could save up to $15,000, for a maximum of 30 years, in their accounts before transferring their balance to a private sector Roth IRA.

At this time, no employers can offer a myRA since the program has not been created by the government.  You’ll have to wait for the program to be established and for employers to opt into the program.  Look for the myRA to roll out sometime near the end of 2014.  As far as the “details”, the government has provided some guidelines/rules for the program.  This is what we know at this point in time: 

  • Income limits:  Individuals with adjusted gross income of less than $129,000 and couples with less than $191,000.    
  • Tax Treatment:  Contributions are after tax.  Interest and earnings compound tax free and withdrawals of contributions, interest, and earnings after age 59½ are tax free if you’ve had the account for at least five years.
  • Annual Contribution Limits:  $5,500, plus $1,000 for those age 50 or older.
  • Investments: Government-guaranteed bond fund with a guarantee the account balance will never go down.
  • Fees: None
  • Account Minimums:  $25 to open an account and $5 contribution that is automatically deducted from payroll.
  • Portability:  Yes.  Once opened and funded, the account is the employee’s to keep.
  • Rollover Triggers:  Must rollover into a Roth IRA when the account tops $15,000 or after 30 years, whichever comes first.  You also have the option to rollover upon leaving an employer.

As mentioned, the program should be implemented by the end of this year.  Until that time, the details may change so stay tuned for updates.

 

The Bottom Line

 

Given the numerous economic and social benefits of employer-sponsored retirement plans, the myRA meets the needs of those who are not currently covered by an employer.  The myRA is exactly what it bills itself out to be; a simple, cost effective way for an employed person to save for retirement.  While the investment options are limited to a single asset class, a U.S. Government bond fund, the account is guaranteed to never go down and, once certain thresholds have been met, the investor can roll the balance of the account into a private sector Roth IRA.  All in all, anything that allows a person to get save for retirement is a good idea.