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.
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.
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