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.