President Obama has announced that he will use his executive authority to direct the Treasury Department to create a new retirement savings account known as “myRA,” for My Retirement Account. He described it as a simple, safe, and affordable “starter” account that will be offered through employers and will be targeted at the roughly half of all American workers who currently lack access to employer-sponsored retirement plans.
According to details released by the White House, myRA accounts will initially be offered through a pilot program, and the rules for the account are due to be finalized by the Treasury by the end of 2014. The account is structured like a Roth IRA, in that contributions are made with after-tax dollars, while distributions are tax free. However, unlike other qualified retirement savings plans, the U.S. government will guarantee the principal, making the account similar to a U.S. savings bond. MyRA accounts will earn interest at the same variable interest rate that applies to the Thrift Savings Plan Government Securities Investment Fund for Federal employees, which at the end of 2013 had an average annual rate of return of 2.32% over five years, or 3.39% over 10 years.
Aimed primarily at low- and middle-income households, the myRA is available to taxpayers with incomes of up to $129,000 a year for individuals or $191,000 a year for married couples. Participation is voluntary, and requires a minimum initial investment of just $25 and payroll deductions starting at $5. Contributions to the account can be withdrawn without penalty, although the withdrawal of earnings before age 59½ will be subject to income taxes and a 10% early withdrawal penalty. Employees who sign up for an account have the option of keeping the same account when they change jobs, and are allowed to roll the balance into a private-sector retirement account at any time. However, participants are permitted to save up to $15,000, or for a maximum of 30 years, in their myRA accounts before they are required to transfer their balance to a private-sector Roth IRA.
While the myRA runs through payroll deduction, the White House said the accounts are associated with little to no cost and will be easy for employers to use, since employers will neither administer the accounts nor contribute to them. Participants will also pay no fees on the accounts.
“Let’s do more to help Americans save for retirement.” Pres. Obama said in the State of the Union. “Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in.”
After announcing the myRA account, Pres. Obama called on Congress to offer U.S. employees access to an automatic IRA, “so they can save at work just like everyone in this chamber can.”
As in previous budgets, Pres. Obama will propose in his 2015 budget establishing automatic enrollment in IRAs, or “auto-IRAs” for employees without access to a workplace savings plan. Under the proposal, employers that do not currently provide an employer-sponsored retirement plan would be required to connect their employees with a payroll deduction IRA. Unlike myRAs, auto-IRAs will require Congressional approval.
Workers would not be required to contribute to an auto-IRA and would be free to opt out. Employers would not contribute to the plans, and the Federal government would offer small employers tax incentives to cover the minimal administrative costs of establishing auto-IRAs. According to the White House, estimates indicate that up to one-quarter of American workers could sign up for an auto-IRA.
For more information about the myRA program, contact one of our qualified tax professionals.