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Will the MyRA really help Americans save for retirement?

In his State of the Union address, President Obama announced that he was going to use the executive powers of his office to create a new retirement savings vehicle. Should you be interested in signing up?

The new type of plan is called a MyRA, a take-off on the long-established Individual Retirement Account, or IRA. Prominent new features of the MyRA, which are supposed to make it even more appealing than an IRA, include its being offered through employers but administered by the federal government, and the guarantee the government offers on funds placed in the account.

Is that enough to tempt you? To think it through further, consider the following pros and cons of the program:

Pros of the MyRA

  1. It is an initiative to address a major problem in the U.S. Retirement savings rates are chronically low, and they have become one of those problems that everyone talks about but nobody does anything about. This program both recognizes the problem and attempts to act on it.
  2. It could lower the barrier to starting retirement saving. The idea is a "prime the pump" approach: If you make it easier for people to get started, retirement savings will become a long-term habit.
  3. Your principal would be guaranteed. Risk-averse investors will like the fact that MyRAs are intended to be invested in government securities, so they can't lose money. Such a conservative approach might be sensible for inexperienced investors.
  4. There is a tax benefit. The interest you earn in the account will not be taxed until you withdraw the money.

Cons of the MyRA

  1. The investment approach may not be appropriate for long-term retirement investing. Long-term retirement plans are typically funded with investments that have growth characteristics. Especially at today's low interest rates, the conservative government income securities that MyRAs are limited to will have a hard time staying ahead of inflation.
  2. The tax advantage is limited. While the interest you earn won't be taxed right away, the contributions you make to these plans will not be deductible. That does not create an immediate incentive for people to put money into these plans.
  3. The benefits of this program are generally available in other forms already. A MyRA would have characteristics very much like a Roth IRA, in that it is made up of after-tax contributions with deferred taxes on any account earnings. You could even mimic the principal guarantee in a Roth, if you invested in an FDIC-insured savings account or in government securities. The question, then, is why would anyone who has not availed themselves of an IRA be motivated to put money into a MyRA?
  4. The upside is very limited. Curiously, the value you can accumulate in a MyRA will be capped at $15,000. Once you reach that point, you would have to roll the money into a Roth IRA to continue receiving the tax deferral on interest earnings. $15,000 is an almost negligible amount when it comes to funding a retirement. The government is taking on all the trouble of administering this new program, with very meager potential benefit for retirement savers.

With an income ceiling of $191,000 for participants, the MyRA would be available to the vast majority of Americans. But how many of those potential participants will find this more appealing than other retirement approaches remains to be seen.

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