In his annual State of the Union speech this year, the president announced a new kind of retirement savings plan – the MyRA.
Critics are quick to say that even a full MyRA won’t do much for you in retirement, but that’s not the point. It can teach you to save. It’s designed for the millions of people whose employers don’t offer a retirement plan.
That’s half of all workers and 75 percent of part-timers, according to the White House. But anybody making less than $129,000 a year will be eligible for a MyRA when they roll out “in late 2014,” the Treasury Department says. (That’s as specific as the federal government has gotten.)
That is, if your employer decides to offer them. They aren’t required to, although there’s no good reason for them not to. It’s just a payroll deduction, so it’s not really burdensome to them. As the Treasury puts it:
“MyRAs will be free and easy for employers to offer. Employers may distribute myRA information but will not administer employee accounts or contribute to them. On payday, employers will send a direct deposit to each participating employee’s myRA.”
Not good enough?
That’s just one of the limitations of the new MyRAs. The mainstream media have recently piled on with their own critiques…
- Not enough investment: “Folks may think that saving $5, $10 or even $20 every paycheck will be enough even over 30 years. It won’t be. … It’s not enough to open the door to a starter savings account. You have to show people how to overcome the issues that keep them down financially,” the Washington Post says.
- Not enough time: “While it’s being touted as a retirement account, myRA arguably makes the most sense for short-term savings like an emergency fund or savings for a home purchase or education expenses in the next few years,” a financial planner writes for Forbes.
- Not enough return: “A path to riches it’s not. If it had existed in 2012, it would have produced a return of 1.47 percent. Standard & Poor’s 500-stock index funds returned 16 percent in 2012. The 1.47 percent return wasn’t even enough to keep up with inflation, which was 1.8 percent that year,” Bloomberg Businessweek says.
But even if it’s not perfect, Americans clearly need something to get them going. A whopping 57 percent of Americans have less than $25,000 saved for retirement – and more than a quarter have less than $1,000 saved, according to an annual report from the Employee Benefits Research Institute.
So how do you decide to save through a MyRA or something else? You’ll want to talk to an expert, but here are the basics of some major options…
MyRA: The starter kit
The good: Nobody’s suggesting a MyRA alone will suffice in retirement, but they’re an easy and safe place to start because they only require $25 to open and you can contribute as little as $5 per paycheck. That money doesn’t get taxed, and there aren’t any fees. Once your savings reach $15,000, or after 30 years, the training wheels come off and your account will be folded into a private-sector Roth IRA.
The catch: Unlike other retirement accounts, contributions to a MyRA can only be invested in one place: Treasury bonds. That means you can’t lose the money, but you probably won’t make a ton, either.
MyRAs are structured similarly to Roth IRAs (see below) and that means everything you put in can be pulled back out at any time, without penalty. But you do face taxes and a possible penalty if you also dip into the interest on your investment before you’re 59 1/2.
Learn more: at the Treasury’s Ready Save Grow website.
401(k): The big pot
The good: This is an employer-sponsored retirement savings plan, named after a section of the federal tax code. Not all employers offer them, but they’re the main retirement plan for millions of Americans.
There’s a limit you can put in each year. For 2014, the IRS says it’s $17,500. Or $23,000 if you’re over 50.
What’s cool about 401(k)s is that some employers will kick in matching funds up to a certain amount – basically giving you free money to encourage saving. So if your employer matches 3 percent and you put in at least 3 percent of your $50,000 salary, you’ll get an extra $1,500 in savings.
The catch: It’s not as easy to withdraw money from your 401(k). Pulling out anything before you’re 59 1/2 means taxes and a 10-percent federal tax penalty. And while they can earn more than a MyRA, they can also lose money. Some people lost more than a quarter of their 401(k) savings in the recession, EBRI says.
Learn more: on the Financial Industry Regulatory Authority website.
IRA and Roth IRA: Extra room for big savers
The good: This is where the MyRA gets its name. It stands for individual retirement account, and there are two main types: traditional and Roth. The major difference to remember is that you pay taxes on traditional IRA investments on the back end, when you withdraw money. With a Roth IRA, you pay taxes up front to avoid them later.
The catch: Like a MyRA, a Roth IRA allows you to withdraw contributions – but not investment earnings – without penalty. Taking money out of a traditional IRA early means penalties just like a 401(k).
And at most, the IRS allows you to contribute $5,500 ($6,500 if you’re age 50 or older) per year to an IRA.
Learn more: at CNN Money’s retirement guide on the topic.
The problem for many Americans can be summed up by this question: “How can I possibly save for retirement when I’ve got crushing credit card debt right now?”
The answer might be a MyRA – and some credit counseling. As NPR explained, “The MyRA is for lower-income Americans who don’t have a lot of assets and who are afraid and don’t have the investment education.” After all, anyone can afford $5 a week, and they won’t miss those few dollars because it’ll be deducted from their paycheck before they ever see it.
So if you’re not sure what to do, a MyRA might be right for you.