What Is a myRA Retirement Account?
Laura explains a brand new type of retirement account called the myRA. Find out the pros and cons, who’s eligible to have one, and how to set one up.
Laura Adams, MBA
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What Is a myRA Retirement Account?
Let me take you back to January 28, 2014.
If you saw or heard the State of the Union Address that evening, you might remember that President Obama announced a new type of retirement account called a myRA. Now, almost two years later, the program is up and running.
In this post, I’ll explain what a myRA account is, cover the pros and cons, tell you who’s eligible to have one, and how to set one up.
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What Is a myRA Retirement Account?
myRA is short for “my retirement account” and it’s essentially a Roth IRA, but with more limitations. First, I’ll cover the similarities between a myRA and a Roth IRA and then I’ll highlight three major differences you should know.
With both a myRA and a Roth IRA you make contributions on an after-tax basis, which means they’re not deductible on your tax return. Unlike a traditional IRA that does give you a tax deduction upfront, these non-deductible accounts offer a future tax break instead. After you reach the official retirement age of 59½, you can withdraw both your contributions and earnings completely tax free.
But what if you need to tap your money before retirement? These accounts are unique because they also give you the flexibility to withdraw your contributions earlier, without paying a penalty. That’s because you already paid tax on your contributions and they’re never taxed again when they’re taken out.
However, that’s not the case for your earnings in a myRA or a Roth IRA because unlike your contributions, they were not previously taxed. So withdrawing any amount of your interest or growth from a myRA or a Roth IRA before age 59½ does trigger income tax plus a penalty.
For example, let’s say you contributed a total of $5,000 and earned an additional $500 in interest. You could withdraw the $5,000 at any time with no penalty. But taking out the $500 of growth triggers income tax plus an additional 10% early withdrawal penalty on that amount.
There are some exceptions when you don’t have to pay the penalty, such as using your earnings in a myRA or a Roth IRA for approved expenses, such as:
- Buying your first home (up to $10,000)
- Paying for college
- Paying for unreimbursed medical bills
- Buying health insurance when you’re unemployed
Free Resource: Retirement Account Comparison Chart (PDF)—a handy one-page download with the rules for the most popular retirement accounts.
Who Can Have a myRA Retirement Account?
For 2015, you can’t make new contributions to a myRA or a Roth IRA if you earn over $131,000 as a single taxpayer, or $193,000 if you’re married and file taxes jointly.
Since the myRA is a type of Roth IRA, it comes with the same requirements and limits. In order to have either one you must have earned income, such as a salary or wages in the United States.
You’re also not eligible to contribute to either account if your income exceeds certain limits. For 2015, you can’t make new contributions to a myRA or a Roth IRA if you earn over $131,000 as a single taxpayer, or $193,000 if you’re married and file taxes jointly.
The same annual contribution limits that apply to a Roth and a traditional IRA also apply to the myRA. For 2015 and 2016 you can contribute up to $5,500, or $6,500 if you’re age 50 or older.
This is an aggregate limit that applies to all of your IRA accounts. For example, you could contribute $2,500 to a traditional IRA, $2,500 to a Roth IRA, and $500 to a myRA, in the same year—but not $5,500 to each account.
The annual income and contribution limits may change in the future because they’re reviewed by the IRS and are periodically adjusted for inflation.
See also: 10 IRA Facts Everyone Should Know
What Are the Differences Between a myRA and a Roth IRA?
Now that you understand the basic rules for having and contributing to a myRA and a Roth IRA, let’s dig into their three main differences.
Difference #1: You can only purchase savings bonds with a myRA.
Unlike a Roth IRA, which allows you to own just about any mainstream investment—such as stocks, bonds, mutual funds, index funds, and exchange-traded funds—a myRA only allows you to own U.S. Treasury savings bonds.
Your investments in these government securities are guaranteed to never lose value, which is terrific. This security may give first-time investors, who could fear the volatility of the financial markets, enough confidence to get started.
The downside is that the investment return is very small. Last year the return on these saving bonds was a measly 2.3%. Over the 10-year period ending December 2014, the average return was 3.1%—barely keeping up with inflation.
Comparing these returns to average equity investments shows what you’re missing. Over the long run, the stock market has had average returns over 10%. And even when you adjust them for inflation, you still get about a 7% return.
To understand which types of investments are right for you be sure to read or listen to Are You Making Investing Too Complicated?.
Difference #2: You can only accumulate a small balance in a myRA.
Besides only being able to buy savings bonds, another huge difference between a Roth IRA and a myRA is that you can only accumulate $15,000 in a myRA.
Besides only being able to buy savings bonds, another huge difference between a Roth IRA and a myRA is that you can only accumulate $15,000 in a myRA. That’s it—hardly enough to retire!
The Obama administration says the myRA is designed to be a starter retirement account. Money you contribute earns a small amount of interest until the balance reaches $15,000 or you’ve owned it for 30 years (whichever comes first).
Once you hit the $15,000 threshold, you’re required to transfer the balance out of your myRA and into a Roth IRA. This is called a rollover and it doesn’t trigger any tax or penalties.
If you don’t take action, the government will automatically do a rollover for you to Comerica Bank, which is a financial agent for the federal government. But you can also roll over your myRA balance to a Roth IRA of your choice at any time.
As I previously mentioned, with a Roth IRA you have a variety of investment options that offer much higher returns than savings bonds. Your investment choices depend on the brokerage company you choose, such as Scottrade, Betterment, or FutureAdvisor.
Difference #3: You pay no fees with a myRA
While the myRA offers little investment return, the one slight advantage it does have is charging absolutely no fees to open or maintain the account. Your initial investment can be as low as $25 and then you can make periodic contributions of as little as $5.
For a Roth IRA, the fees and initial investment amount depends on the brokerage you choose. However, many don’t charge fees to open or maintain your account and have no minimum balance requirement.
Most brokerage firms charge commissions when you buy or sell investments (such as stocks or mutual funds), or charge an annual management fee that could be as low as a fraction of a percent, based on your account balance.
Remember that you can choose investments in a Roth IRA that earn much more than the 2% to 3% you’ll get on myRA savings bonds. So you can easily cover any Roth account fees and still be way ahead on your earnings.
Should You Open a myRA Retirement Account?
One of the so-called benefits that myRA pundits are touting is that even if your employer doesn’t offer a retirement plan, you can have your boss set up a direct deposit from your paycheck to your myRA. Another feature they seem excited about is an alternative way to fund your myRA: sending your tax refund to your account.
Both of these options to fund a myRA are great—but they already exist for IRAs! Maybe they forgot that employers can already create a Payroll Deduction IRAopens PDF file to send direct deposits to your traditional or a Roth IRA.
And you can also have all or a portion of your tax refund sent to a traditional IRA, Roth IRA, or SEP IRA. So there’s really nothing innovative or beneficial in the myRA program. In fact, it just seems like a handy way for the federal government to sell more savings bonds in order for Uncle Sam to pay its debts.
Due to its low return and low balance threshold, the myRA is not a magical solution for building a healthy retirement account. Since you can only accumulate $15,000 in one before it automatically turns into a Roth IRA, why not just start with a Roth?
As I mentioned, a Roth gives you a huge selection of investment options that will yield much higher returns, like stock mutual funds or index funds. Even if you’re very conservative and only want low-yield, fixed income investments like bonds and money market accounts, you can own them with a Roth IRA as well.
How to Set Up a myRA Retirement Account
If you want a myRA, there are three ways you can set one up:
- From your paycheck. If your company offers direct deposit, you can give your employer the myRA Request Letteropens PDF file and the Direct Deposit Authorization Formopens PDF file so they can send after-tax funds from your paycheck to your myRA. But your boss is under no obligation to do this for you.
- From your bank account. If your employer isn’t willing to handle a direct deposit for you or you’re self-employed, you can set up recurring or one-time transfers to your myRA from your bank. You’ll find step-by-step instructions at myRA.gov. Remember that you can also set up automatic contributions from your bank account to a traditional IRA, Roth IRA, or a retirement account for the self-employed (such as a SEP IRA or a solo 401k).
- From your tax refund. If you expect a tax refund you can request that all or a portion of it go to your myRA using Form 8888, Allocation of Refundopens PDF file . As I mentioned, you can also use the form to request that a refund go to your traditional IRA, Roth IRA, or SEP IRA.
The Best Ways to Invest for Retirement
If you’re eligible for a workplace retirement account, such as a 401k, 403b, or 457 plan, that’s the best way to invest. Using those accounts gives you multiple benefits, including:
- tax advantages
- employer administration
- automatic payroll deductions
- high contributions limits of up to $18,000, or $24,000 if you’re 50 or older
- special incentives such as employer matching.
Having retirement contributions automatically deducted from your paycheck makes you more likely to invest. When you don’t have to think about it, that’s one less behavioral barrier to overcome.
Having retirement contributions automatically deducted from your paycheck makes you more likely to invest. When you don’t have to think about it, that’s one less behavioral barrier to overcome.
You get used to making regular contributions and managing spending based on your net paycheck. You won’t even miss the contribution after a few pay periods.
But if you don’t have a job that comes with a retirement plan, I’m completely in favor of getting your boss on board with direct deposits to your IRA or myRA. Sometimes the challenge is simply getting started and creating a system for investing that’s easy to maintain going forward.
Just remember that unlike a 401k, employers don’t administer individual accounts, like a myRA or IRA, and can’t match your contributions. They simply facilitate a direct deposit of a portion of your paycheck into your account. And if you leave your job, you take your retirement account with you, so there’s no downside.
If you max out a workplace plan and still have money left over to invest for retirement, max out an individual account such as a Roth IRA—or a traditional IRA, if you earn too much for a Roth.
And if you work for yourself or run a small business, consider investing through a retirement account designed for the self-employed. They offer much higher contribution limits than an IRA or myRA. To learn more, read or listen to 5 Retirement Options When You’re Self-Employed.
If you’re a first-time investor looking for an extremely safe and simple solution, the myRA may be a good choice. As I mentioned, it’s not a silver bullet for building a cushy retirement fund on its own, but getting started investing even small amounts is much better than doing nothing.
So take steps to begin and maintain the habit of saving for retirement using the account(s) of your choice. Your future retired self will be so glad you did.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.