According to The New School, seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Obama recently unveiled his myRA program, an individual retirement account backed by the government, aimed at lower to middle income Americans who don’t have access to employer-sponsored retirement plans.
All workers whose household income falls below $191,000 a year, or up to $129,000 for an individual, will be eligible to invest in the accounts, including those that currently invest in a 401(k) plan. The account will function like a Roth IRA, in which account holders will contribute after income taxes are paid and tax-free withdrawal after retirement. The main difference between a myRA account and a traditional Roth IRA is that the myRA accounts only invest in government savings bonds. This investment is similar to a safe savings bond, in that it is backed by the U.S. government and thus secures the principal investment of account holders. The myRA account won’t be affected if an account holder changes jobs, and they will be able to contribute to the same account from multiple part-time jobs.
Initially, a worker would only have to contribute $25 and then as little as $5 through subsequent payroll deductions. As in a traditional Roth IRA, contributions are limited to $5,500 or $6,500 if over 50 years of age. Once the balance reaches $15,000 or the account has been open for 30 years, it will be rolled over to a private sector Roth IRA. Returns would be similar to the Thrift Savings Plan offered to federal employees that yielded 1.47% over the last year. Workers would be able to withdraw their principal at any time without penalty, thus making their contributions available before retirement if need be; however, anyone who withdraws the interest earned before age 59 ½ will be subject to income tax and a 10% withdrawal penalty.
Many small businesses do not offer retirement programs, and myRAs are an option; however many will find after proper due diligence that 401(k) plans will be the best option for employee savings. Employees will also be spared any fees usually associated with retirement accounts because the federal government will cover the administrative expenses for the employer. An alternative to myRA is the proposed auto-IRA legislation that would require small businesses to automatically enroll workers in an IRA on a direct deposit basis, unless they opt out. The success of myRAs will depend on the employer encouraging their workers to take advantage of the program, one that requires little effort on their part, but can make a big impact in their employees’ future.
While the investment yield isn’t considerable, the risk of investment loss is zero, making this an attractive starter kit for those individuals looking to start a retirement plan and also a way for small businesses to attract workers. It’s one option for digging Americans out of the retirement savings pit, by providing a framework for first-time savers and an opportunity for small businesses to offer a retirement savings account.