In his State of the Union address, President Obama shined a spotlight on the importance of saving for retirement, and announced plans to create a new myRA retirement savings account targeted at some of the millions of Americans who currently don’t have access to workplace retirement plans.
The myRA proposal combines some components of existing retirement savings programs and may be attractive for individuals, such as part-time workers, who do not have access to a workplace savings program, such as a 401(k). The government backing of investments in the myRA proposal might also alleviate concerns that some investors may have about market volatility and the loss of principal.
myRA nuts and bolts
The myRA is essentially a version of the Roth IRA—most of the Roth rules apply, including eligibility, contribution limits, tax benefits, and the treatment of withdrawals (see table).
As with the Roth IRA, the White House says that participation will be limited to individuals with an annual adjusted gross income (AGI) of less than $129,000, and couples with an AGI of less than $191,000, indexed annually for inflation. Total annual contributions to myRAs would be limited to $5,500 a year, plus another $1,000 for those age 50 and over.
Tax treatment is also similar to a Roth. Contributions are after tax. Interest and earnings compound tax free. Withdrawals of earnings before age 59½ would be subject to income taxes and a possible penalty. After age 59½, all withdrawals of principal or interest would be tax and penalty free if you've had the account for at least five years. Also like Roth IRAs, myRAs would not be subject to minimum required distributions.
In addition to the ease of withdrawals, what’s particularly distinctive about the myRA versus other retirement savings options is its low contribution minimums and federal guarantee that the account will not drop in value. The myRA account will also be offered with no fees to the worker. And the myRA would be portable, so employees could take it with them when they change jobs.
Some other important differences between the myRA and other retirement savings options are the following:
- Although myRAs would be voluntary for both employers and employees, workers can’t sign up until their employer sets up automatic payroll deductions. At that point, eligible employees would be able to deduct a portion of their pay each pay period, after tax, and put it away to help fund their retirement expenses.
- The myRA will have only one investment option: a bond fund similar to the G Fund (Government Securities Investment Fund) currently offered inside the government's Thrift Savings Plan (TSP), which provides a variable interest rate that trends with government bonds, but also a principal guarantee that the account balance will never decline. By contrast, investors with Roth IRAs generally have no guarantees but may be able to choose among the thousands of stock, bond, and other funds and securities available on brokerage platforms.
- Another difference between the Roth IRA and the myRA involves minimums and fees. To start saving in the myRA, employees need only $25. After that, contributions of as little as $5 can be made by payroll deductions. The Treasury Department has also stated that the myRA will have no fees. With a Roth IRA, there can be minimums and fees to open an account, though there are none at Fidelity. Of course, the investment options in the account can be subject to mutual fund fees and trading costs, depending on the investment choices selected. However, if you sign up for automatic savings at Fidelity, the fees on certain mutual funds would be waived.
- Other distinctions of the myRA are its dollar and term limits. Savers may voluntarily roll over myRAs to private-sector retirement accounts at any time. But once the participant accumulates $15,000 in the account or after 30 years, whichever comes first, a rollover would be required. Roth IRAs do not have such requirements.
The U.S. Treasury Department has indicated that it plans to get the myRA up and running later this year. Between now and then, further details will be worked out, and Fidelity will provide updates.
Getting on track
So, how does the myRA proposal match up with Fidelity’s retirement savings guidance, and how can inspired investors take action now?
Last year, Fidelity surveyed several thousand American households to understand how prepared people were to cover basic expenses like housing, food, and health care in retirement. The results were sobering. We found that 55% of American workers were in fair or poor condition and were not on track to cover their essential expenses in retirement. Among Generation Y (born 1978–1988), 62% were in fair or poor shape. (Read Fidelity Viewpoints®: “Rev up your readiness to retire.”)
When we looked at those investors who were on track to cover their retirement expenses, starting early and the amount saved were the biggest contributors to success, followed by an age-based asset allocation. Fidelity suggests that people save at least 10% to 15% of their income, including employer contributions, annually in a tax-deferred retirement account, and do it consistently over their working lives. Investing for long-term growth to outpace inflation is also key to success. For most people, that means investing largely in stocks during their early working years, and dialing their equity allocation back as retirement nears.
In recent years, an increasingly popular solution has been to invest in a target date fund, which adjusts the fund’s asset allocation over time, starting with a heavy exposure to stocks further from the target date and shifting to more fixed income as the target date approaches. While target date fund balances do fluctuate and have had years of negative performance, over time this age-based asset allocation model has proven successful and performed as designed for investors who stayed the course through periods of market volatility.
“The new myRA proposal is a great reminder about the need to save regularly each pay period,” says John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity Investments. “But it’s important to note that existing accounts like the Roth IRA are similar—and investors won’t necessarily have to wait until the proposal rolls out later this year to begin saving and investing.”