myRA May Not Be YOUR RA

retirmentSuppose somebody offered you a choice between two cars. The first car was identical to the second car, with one exception: it would only travel at a constant speed of 30 miles an hour. In the other car, you could could choose to travel at any legal speed, and quite a number of illegal ones. Meanwhile you can only buy the one-speed car if you make less than a certain threshold income, and eventually, if you drive enough miles in the one-speed car, you’d have to buy the car that can travel at any reasonable speed anyway.

Which car would you choose?

That’s the interesting choice posed by a new retirement account that was launched on Wednesday. In his 2014 State of the Union address, President Obama announced that he was directing the U.S. Treasury Department to create a new retirement savings initiative: the myRA, officially named My Retirement Account. This week, the first retirement savers will put the first dollars into the program.

The myRA is basically a government-sponsored Roth IRA with the same contribution limits ($5,500 a year, or $6,500 for those 50-and-older). Like the Roth IRA, all myRA contributions will be made after-tax (in other words, no deductions for the contributions), but the money will come out tax-free when the taxpayer reaches age 59 1/2. However, unlike the Roth, where the money can be invested in zillions of possible combinations of thousands of mutual funds, ETFs and individual stocks, the myRA participant has exactly one investment option: the government’s Securities Fund for federal employers, which earned 2.31% last year.

Moreover, there are limitations on who can participate in the myRA. Only people with no 401(k) or 403(b) retirement plans at work can make myRA contributions, and even then, only those with an adjusted gross income less than $131,000 a year ($193,000 for couples). Also: once you’ve accumulated the maximum myRA balance of $15,000, you have to move the money over to a private-sector Roth IRA. The only benefit: the myRA doesn’t come with any custodial or account fees, but those are typically nominal when you open a private sector Roth IRA.

So why would people contribute to a retirement option that is identical to a Roth IRA, but with roughly a zillion fewer investment options? It’s possible that unsophisticated investors will appreciate the simplicity of the myRA solution, where, instead of having to decide where to invest, they simply lend their money to the federal government and collect the (modest) interest. The fact that the myRA account has no minimums could be attractive. Most private sector Roths require at least $1,000 to be invested, but theoretically you could start your myRA with a penny.

It’s also possible that the U.S. Treasury Department is about to discover that there’s less demand for an inferior retirement plan than government economists had projected.

Sources:

http://www.forbes.com/sites/ashleaebeling/2015/11/04/myra-starter-retirement-accounts-launch-nationwide/?utm_campaign=ForbesInvestor&utm_source=TWITTER&utm_medium=social&utm_channel=Investing&linkId=18500480

http://www.investmentnews.com/article/20151104/FREE/151109976/government-officially-launches-myra-program-for-retirement-savings

http://www.cnbc.com/2015/11/04/oh-myra-what-a-misguided-bureaucratic-mess-this-will-be.html

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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