The Act 2 Column: The myRA idea? Starting a savings habit
Just in case you thought there were not enough retirement accounts to choose from, along comes President Barack Obama's latest entry in the crowded category. His "myRA" (rhymes with IRA and looks like a misstyped woman's name) is supposed to be a "starter" retirement account for workers who do not currently have an employer- based plan available and whose small contributions to a traditional or Roth IRA would be eaten up by investment fees. (About half of all workers and 75 percent of part-time workers lack access to employer-sponsored retirement plans, according to the White House.)
A myRA account will be similar to a Roth IRA, in that contributions are made with after-tax dollars and grow tax-deferred, and their availability will be limited by income (married couples with modified adjusted gross incomes up to $191,000 and individuals earning up to $129,000). The money you put into a myRA account can be withdrawn tax-free at any time without penalty, subject to the same restrictions as the Roth. Additionally, contributions that you make to a myRA will count against your Roth contributions, and the same annual limits will apply: $5,500 per year if you are under age 50 and $6,500 if you are 50 and over.
If it's just like a Roth, you may be wondering why the myRA needs to exist at all? The myRA has three differentiating features from the Roth:
It requires a low minimum investment.
Participants will be able to contribute through payroll deductions.
The cost of investing is zero.
One complaint that I have often heard from readers and listeners of my radio spots is that even no-load fund families like Vanguard, Fidelity and T. Rowe Price require anywhere from $1,000 to $3,000 for the initial purchase of a fund inside of a Roth IRA. (As a note, TD Ameritrade has no minimum to establish either a Roth or an IRA.) The myRA attempts to address the quandary of high minimums by setting the bar low: initial investments can be made with as little as $25, and continuing contributions can be as little as $5.
The money will go into myRA accounts through payroll deductions -- initially through a pilot program to workers whose employers sign on by the end of this year. Once the program reaches full implementation, anyone who has direct deposit for his or her paycheck will be eligible to enroll, according to Treasury.
This is a helpful feature, since it's always harder to make a retirement contribution once that money hits the general checking and savings account.
There is nothing that will eat away at investments faster than fees. Even if you purchase an inexpensive index fund within a retirement account, there is always some expense. With the myRA, retirement savers will have no cost at all, but there's a hitch: you only get one investment option. (Think of this as the Henry Ford approach: you can have any car color you want, as long as it's black!)
Obama will instruct the Treasury Department to create a safe, fixed investment fund modeled after the federal employees' Thrift Savings Plan (TSP) Government Securities Investment Fund ("G-Fund"), which pays a variable rate. That fund earned around 1.75 percent in 2012 and had an average annual return of nearly 2.7 percent for the five years that ended in December 2012, and 3.6 percent between 2003 and 2012.
Finally, unlike the Roth, savers will be able to fund the myRA to a total of $15,000. After reaching that threshold, or after 30 years, the balance can be rolled over to a private retirement account.
Obviously, saving $15,000 is not going to be enough for anyone's retirement, but I like the idea because it helps to model the behavior of retirement saving. For those who have not had the opportunity to do so, I am all for a plan that helps to get them on the right track.
Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.