Imagine if the federal government offered a new variation on the Roth IRA for 2015. When you opened a version of this new account, you would still make all contributions on an after tax basis. So long as you maintained this account until retirement, you would be able to withdraw all funds on a tax-free basis, with the added bonus of taking your withdrawals as you please, free from the RMD dictates of a Traditional IRA. But here are the twists. First, you would only be able to invest your contributions in exactly one type of financial product – government securities that guarantee you will never lose any of your principal, but also ensure an incredibly low rate of return over the lifetime of the investment, sometimes not even outpacing inflation. Second, the account could only grow to $15,000 in value, at which point you would need to sign up with a commercial financial institution and covert this IRA into a regular Roth IRA. Finally, you could only open and contribute to this account if your employer agreed to offer it as a benefit of working at your firm. Should you leave your current employer and take a job with another firm that does not offer this benefit, then you could not make any new contributions to the account.
This doesn’t sound like a very good deal for the average American worker, right? Yet it is what is on offer in 2015 as part of the Obama Administration’s signature retirement savings innovation – the so-called MyRA. To be fair, the Administration is attempting to address a serious problem – Americans are just not saving enough to provide for their retirement. Others have done yeoman’s work to delineate the scope of this crisis, and President Obama deserves some credit for putting a potential solution on the table. However, the flaws of the MyRA are too glaring to recommend it to anyone as a credible approach to retirement savings.
The MyRA is so limited because the Administration could only rely on an executive action to establish this new mechanism. Congressional Republicans made clear they would not pass legislation opening a new path to more effective retirement savings unless it is an element of a more comprehensive tax reform package, something not politically feasible in recent years. The Administration, having its hands tied without any new statutory authorization, decided to creatively exploit the inherent authority of the Executive Branch to issue debt – now Americans can invest in a new type of government bond to help finance federal expenditures, and oh by the way begin to build up their savings for retirement. Hence, we have the MyRA.
Anyone interested in a serious long term approach to building retirement savings should stay far away from the MyRA. There are two time-tested principles for the long-term accumulation of savings – a broad diversification of assets and an emphasis on those investments that can outpace inflation over a long period of time. The MyRA fails both of these tests. The only benefit the MyRA offers in terms of retirement savings is an automatic deduction from your paycheck at regular intervals, handled by your employer, which introduces a beneficial level of automation to the act of savings. However, an individual can simply open a Roth IRA with Vanguard, Fidelity or any other financial institution and arrange for bi-weekly or monthly withdrawals from their checking accounts if forget-about-it automation is what he or she desires.
However, the MyRA does offer one interesting benefit, especially for low-income workers who may have difficulty accessing traditional banking channels. Instead of thinking of the MyRA as a retirement savings vehicle, these workers may be better off if they regard it as a safe, low frills emergency savings fund. Here’s why: because the MyRA is really a Roth IRA by another name, that means all contributions are made on an after-tax basis. Hence, all contributions can be withdrawn at any time, without any additional taxes or penalties incurred. Moreover, unlike many savings accounts offered by commercial financial institutions, the MyRA not only does not charge any fees, but also avoids the annoying minimums, e.g. a minimum deposit to open an account and/or a minimum level of funds to keep the account open.
So a MyRA could serve as a de facto rainy day fund for households. Individuals can build up savings over a period of time through automatic withdrawals from their paychecks. If an appliance breaks, a family member gets sick, or your car gets hit with an unexpected repair, then a MyRA makes more sense as a source of funds than an expensive payday loan or harming your credit by delaying payment on other bills.
Using the MyRA as an emergency savings fund is a less than ideal option. In a perfect world, an individual would maintain rainy day savings in a bank offering a competitive interest rate while saving his or her IRA accounts for the long term accumulation of savings for retirement. However, many low income Americans, a principal target audience for this new type of IRA, do not enjoy the luxury of having both types of savings. Instead, they have to make hard decisions on a daily basis on paying for today’s necessities vs. tomorrow’s opportunities. Thinking of the MyRA as a low-frills and efficient mechanism to build up emergency savings may be a smarter approach than treating it as a serious means of saving for your retirement.
Jofi Joseph is making a mid-career transition into the world of tax accounting. He is currently earning his Masters of Accountancy at George Washington University and will sit for his CPA license next year.
This doesn’t sound like a very good deal for the average American worker, right? Yet it is what is on offer in 2015 as part of the Obama Administration’s signature retirement savings innovation – the so-called MyRA. To be fair, the Administration is attempting to address a serious problem – Americans are just not saving enough to provide for their retirement. Others have done yeoman’s work to delineate the scope of this crisis, and President Obama deserves some credit for putting a potential solution on the table. However, the flaws of the MyRA are too glaring to recommend it to anyone as a credible approach to retirement savings.
The MyRA is so limited because the Administration could only rely on an executive action to establish this new mechanism. Congressional Republicans made clear they would not pass legislation opening a new path to more effective retirement savings unless it is an element of a more comprehensive tax reform package, something not politically feasible in recent years. The Administration, having its hands tied without any new statutory authorization, decided to creatively exploit the inherent authority of the Executive Branch to issue debt – now Americans can invest in a new type of government bond to help finance federal expenditures, and oh by the way begin to build up their savings for retirement. Hence, we have the MyRA.
Anyone interested in a serious long term approach to building retirement savings should stay far away from the MyRA. There are two time-tested principles for the long-term accumulation of savings – a broad diversification of assets and an emphasis on those investments that can outpace inflation over a long period of time. The MyRA fails both of these tests. The only benefit the MyRA offers in terms of retirement savings is an automatic deduction from your paycheck at regular intervals, handled by your employer, which introduces a beneficial level of automation to the act of savings. However, an individual can simply open a Roth IRA with Vanguard, Fidelity or any other financial institution and arrange for bi-weekly or monthly withdrawals from their checking accounts if forget-about-it automation is what he or she desires.
However, the MyRA does offer one interesting benefit, especially for low-income workers who may have difficulty accessing traditional banking channels. Instead of thinking of the MyRA as a retirement savings vehicle, these workers may be better off if they regard it as a safe, low frills emergency savings fund. Here’s why: because the MyRA is really a Roth IRA by another name, that means all contributions are made on an after-tax basis. Hence, all contributions can be withdrawn at any time, without any additional taxes or penalties incurred. Moreover, unlike many savings accounts offered by commercial financial institutions, the MyRA not only does not charge any fees, but also avoids the annoying minimums, e.g. a minimum deposit to open an account and/or a minimum level of funds to keep the account open.
So a MyRA could serve as a de facto rainy day fund for households. Individuals can build up savings over a period of time through automatic withdrawals from their paychecks. If an appliance breaks, a family member gets sick, or your car gets hit with an unexpected repair, then a MyRA makes more sense as a source of funds than an expensive payday loan or harming your credit by delaying payment on other bills.
Using the MyRA as an emergency savings fund is a less than ideal option. In a perfect world, an individual would maintain rainy day savings in a bank offering a competitive interest rate while saving his or her IRA accounts for the long term accumulation of savings for retirement. However, many low income Americans, a principal target audience for this new type of IRA, do not enjoy the luxury of having both types of savings. Instead, they have to make hard decisions on a daily basis on paying for today’s necessities vs. tomorrow’s opportunities. Thinking of the MyRA as a low-frills and efficient mechanism to build up emergency savings may be a smarter approach than treating it as a serious means of saving for your retirement.
Jofi Joseph is making a mid-career transition into the world of tax accounting. He is currently earning his Masters of Accountancy at George Washington University and will sit for his CPA license next year.