Unpacking Obama's MyRA (and What Can It Do for You?)
By James O'Brien
By now, many investors and analysts have taken a look at President Obama's MyRA plan and drawn a reasonable conclusion: It won't get retirees through many years of post-work expenses. But then, that's not the MyRA's purpose. The federal government's newest retirement instrument -- its $15,000 cap and 30-year time constraint are in place -- should be primarily thought of as a starting point for low- to middle-income workers who can't access a company-supported plan.
However, if you dig a little deeper into the details, there's a potential alternative use for the MyRA that could serve some investors well. That is, the MyRA might turn out to be an attractive alternative to the traditional savings account. Let's look at that scenario and how it works.
MyRA savings: An alternative
The basics of the MyRA are this: If your household earns less than $191,000 annually, then you can start a MyRA with a minimum of $25 as your initial investment, subsequently adding as little as $5 at a time in ongoing contributions.
Like the Thrift Savings Plan (TSP) to which federal employees contribute, MyRA accounts are tied to the Government Securities Investment Fund, a.k.a. the"G Fund," which holds a short-term bond, has a guaranteed principal, and is pegged to intermediate bonds in terms of expected returns. It's a slow-growth kind of fund, but that's not our key consideration.
So what's the key? The G Fund's returns. Check the TSP page, and you'll see that in 2013, the fund averaged a 1.89% return. Go back a little further, and the the G Fund returned 2.45%-plus circa 2009-2011. Meanwhile, U.S. savings accounts offer an annual percentage yield -- i.e., interest rate -- of 0.01% to about 1%, with the average being 0.06%.
And now consider this kicker: Unlike private-sector retirement plans, you can withdraw contributions from your MyRA tax-free. Starting to get the picture?
In other words, say you socked away $100 per month for 60 months in a MyRA -- that's a total of $6,000.
- In those first five years, if the G Fund returned exactly what it did in 2013 -- 1.89% -- then you'd have something like $6,283.50 at the end of that period.
- Your MyRA would then start accumulating about $119 annually, increasing as your balance grows -- and again, this is calculated under a hypothetical situation in which the G Fund returns are stuck at that average of 1.89%.
- By comparison, if you put $6,283.50 in the average bank savings account at 0.06% interest, you'd start with a mere $3.77 in annual interest.
Clearly, your traditional bank's APY will never keep up with the MyRA's G Fund rate of return. If you're eligible, why not use it as a short-term savings account?
"This is not really how it's being marketed," says Jamie Hopkins, associate professor of taxation at American College and associate director of the New York Life Center for Retirement Income, regarding this alternative use of the MyRA."For some people it could turn out to be a good short-term savings vehicle. ... Significantly better than a traditional bank, and you're guaranteed growth ... a low amount of growth, but it's better than putting money in a bank."
So consider a fresh look at the MyRA. It's an instrument designed to do something simple -- start a retirement plan -- in a simple way. But packed into its underlying TSP-type infrastructure is an intriguing approach to savings for to low- and middle-income households.
Bottom line: You could make your money work a lot more effectively for you than most traditional savings scenarios will allow, simply by parking some cash in a MyRA for several years and reaping the historically higher G Fund returns.
Does Your Better Half Know
How Smart You Are
With Money Matters?
- Past Results
- Fee Schedules
- Investment Style
You may also be interested in...
By Justin Stoltzfus March 20, 2014 As financial experts sound the warning bells about the American retirement planning crisis, and how little the average worker has saved toward his or her golden years, all kinds of questions arise. What exactly do retiring workers have squirreled away to provide... more
By James O'Brien March 8, 2014 Despite a narrow brush with a new reduction to Social Security benefits, seniors will not see the proposed move to a more conservative cost-of-living adjustment, or COLA, in 2014. President Barack Obama's announcement on Feb. 2 that he was scrapping the... more
By James O'Brien By now, many investors and analysts have taken a look at President Obama's MyRA plan and drawn a reasonable conclusion: It won't get retirees through many years of post-work expenses. But then, that's not the MyRA's purpose. The federal government's newest retirement instrument... more
Millions of employees will change jobs this year through career moves, layoffs or retirement. If you are one of these employees, chances are that this change has left you with a lot to think about. And one important decision you need to make is what to do with your retirement savings. You have... more
In tax planning, the goal typically is to delay the payment of income taxes. Thus, it can be difficult to understand why it might make sense to convert a traditional individual retirement account (IRA) to a Roth IRA, which results in the current payment of income taxes. Factors that favor... more