In January of 2014, the President announced a new investment program being created by the Department of Treasury called the MyRA account. The purpose of this account is to give lower to middle income Americans easier access to a retirement account, so more would be encouraged to start saving. The plan was officially rolled out in November of 2015, so 2016 will be the first full tax year it will be available.

How Does a MyRA Account Work?

MyRA accounts are most similar to Roth IRAs; contributions to the account are made after taxes, meaning they are not deductible during the tax year in which you make the contribution, but the account can grow over time tax-free, and when you are ready to take distributions during retirement, these are tax-free as well. The maximum annual contribution into a MyRA is $5,500 (or $6,500 if you are age 50 or older), but this maximum is combined with any other contributions you may have made to Roth or traditional IRA accounts. Households earning $191,000 per year or less are allowed to invest in a MyRA.

Advantages of a MyRA

The MyRA is meant to be a “starter” retirement account. As such, it has a very low barrier to entry. You can open the account for as little as $1, and make very small contributions, as low as $5 at a time, to build the account. Contributions can be direct deposited from your paycheck, bank account, or taken out of your tax refund. The funds are invested in a newly created Treasury bond that is backed by the full faith and credit of the federal government and delivers a guaranteed rate of return (set annually by the U.S. Treasury).

 

Benefits of the MyRA include:

• No cost to open the account and no annual maintenance fees;
• No minimum investment amount, start with as little as $1;
• Easy to contribute, and contributions can be made anytime;
• Investment backed by the U.S. Treasury;
• Account holders are guaranteed not to lose money;
• Contribution amounts can be withdrawn any time without penalty.

Disadvantages of a MyRA

There are a lot of reasons to consider opening a MyRA, but there are a couple of drawbacks as well. For one, there is only one investment choice (the aforementioned Treasury bond), and it has a fairly low annual rate of return. In fact, similar treasury bonds have averaged roughly 3% annually for the past decade. Although stocks can (and often do) lose money year-to-year, they typically average much stronger growth over the long-term.

 

Another issue with the MyRA is it is not a permanent account. When the account reaches an age of 30 years or a value of $15,000 (whichever comes first), it must be rolled over into a private sector account. At that point, the most logical move would be to roll it into a Roth IRA since these two investment vehicles are so similar in structure.

How does a MyRA differ from a Roth IRA?

The MyRA and Roth IRA are both after-tax investment vehicles. Both allow you to withdraw your original contributions without penalty, meaning they can serve the dual purpose of being an emergency fund. The main difference is the minimum contribution amounts and investment choices. Many brokerages require a minimum of $1,000 to set up a Roth IRA. However, there are some that have lower thresholds and/or monthly payment plans to allow you to build up to the $1,000 minimum. You must also examine the setup and maintenance fees brokerages may charge in exchange for lower minimum investment amounts.

The main advantage of a Roth IRA vs. a MyRA account is the investment options. As mentioned earlier, with the MyRA, you can only invest in U.S. Treasury bonds. By contrast, Roth IRAs offer a myriad of investment options, depending on the brokerage you are set up with. If you want the guaranteed return on investment provided by the MyRA, you can still purchase Treasury bonds through a Roth IRA. However, if you want to shoot for higher annual returns, there are numerous other investments that offer this potential.

Is a MyRA account right for you? If you do not have a lot of money and want an easy way to start saving for retirement, there is certainly a lot to like about these accounts. For further guidance on MyRAs, Roth IRAs, traditional IRAs and the tax implications of each, speak with your local tax professional.