The looming crisis in retirement saving among American workers is now well documented. According to one recent paper from the Schwartz Center for Economic Policy Analysis at the New School, 68 percent of the working age population is not participating in any employer-based retirement plan, despite regular entreaties to take full advantage of their 401(k).
While it is certainly true many employees decline or underutilize the plan offered to them at work, many more simply have no access to a plan. The same study cited above estimates nearly half of U.S. workers are not offered an employer-based retirement plan, or do not qualify due to part-time status. For this segment of the population without an option at work, a new program announced last week seeks to help by providing a simple and attractive alternative to begin the critical process of building a retirement nest egg.
The new plan, dubbed the myRA account, was unveiled by the White House last Wednesday. Essentially a Roth IRA, the myRA account is intended to provide an easy and automated kickstart for workers who need to save but don't have a plan at work. The program has merit and could make a real contribution toward addressing the savings deficit.
Like the Roth IRA, contributions are made with after-tax money (unlike a 401(k) that allows tax-deferred contributions). Therefore, principal may be withdrawn at any time without penalty. However, as with the Roth, investment returns in a myRA account are never taxed (subject to a minimum age restriction of 59 1/2 years and at least a five year holding period). This arrangement is generally more advantageous for younger workers, especially those in lower income tax brackets who are the primary targets of the program.
There are no minimum investment thresholds; participants may contribute any amount at any time up to the statutory maximum, currently $5,500 per year, $6,500 if you are age 50 or over. Participants can choose to fund their accounts in a number of convenient ways: through payroll deduction if your employer offers direct deposit, directly via check, scheduled automatic drafts from your bank or even directing a portion of your federal tax refund into the plan.
Workers with adjusted gross income below certain limits may also be eligible for a tax credit of up to $500, making the program even more attractive.
In the interest of safety and simplicity, the myRA plan offers only one investment option: a U.S. Treasury Bond fund based upon an option in the retirement plans offered to U.S. Government employees. The fund guarantees the principal value and pays a floating rate of interest tied to Treasury yields. While more aggressive options would be welcome, it bears remembering that the program is intended to be a first step toward a more comprehensive retirement program aimed at creating and reinforcing a commitment to saving.
In that regard, the plan terminates when the account has been open for 30 years or attains a balance of $15,000 whichever comes first. At that point, it converts into a conventional Roth IRA account. Of course, you may roll over the myRA into a Roth at any time.
The new plan is not a panacea, and will hardly get the job done by itself. But in providing a convenient, safe and efficient mechanism to bootstrap your retirement savings, the myRA account is a great first step. Visit www.myRA.gov for more information or to sign up. If you haven't started saving for retirement, check it out and sign up today.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.