A friend chatted with me early Wednesday morning. Can you explain this myRA thing? he asked.
Myra who? I replied.
You know, the new type of retirement account Obama announced in the State of the Union last night.
Oh, you mean while I was watching classic Jeopardy! episodes?
Theres a lot we still dont know about the new account (is it MyRA or myRA? how do you pronounce it?). But the basics are clear.
MyRA is a Roth IRA. Like any Roth IRA, you can contribute up to $5500 per year, and you can only participate if your income is less than $191,000 (married filing jointly) or $129,000 (single).
The minimum opening balance for the myRA is $25lower than for most Roth IRAs.
Also like a standard Roth IRA, your contributions are made after tax and are then tax-free on withdrawal as long as youre 59½ or older.
And you can withdraw your contributions (but not the interest on them) at any time with no penalty.
But the similarities end there.
For one thing, youll be able to hold your Roth IRA with the federal government, via the TreasuryDirect site.
The big difference, however, is what goes in the account.
If you open a Roth IRA at a brokerage, you can choose from literally thousands of mutual funds, ETFs, and individual stocks and bonds. MyRA only offers one investment: the G fund.
Nuthin but a G fund
The G fund has been available for years to participants in the governments Thrift Savings Plan (TSP), the 401(k)-like plan for federal employees, postal workers, armed forces members, and so on.
Its really more like a savings account than a mutual fund.
Unlike most mutual funds, the balance never goes down, and your money is covered by an FDIC-like guarantee. But the G fund generally pays more interest than a savings account.
In 2012, for example, the G fund returned 1.47% while even the very best online savings accounts were paying 1%.
Whats the catch?
The myRA isnt for everyone. In fact, its really pitched only at people who have no retirement savings.
The maximum you can put in a myRA is $15,000, after which youre required to roll it over to a Roth IRA at the brokerage of your choice. (You can also roll it over earlier if you like.)
Employers will be encouraged to publicize the myRA and help employees sign up and set up payroll deduction. Employers wont be allowed to sign people up automatically, however.
Theres nothing revolutionary about the myRA, which will be available starting later this year.
But it will likely appeal to people who dont have a retirement plan available at work, are able to contribute a little bit of their paycheck toward retirement, and dont know how to get started.
I want it now
Say youre in that boat. You know you should be saving for retirement and are eager to get started, but dont want to choose a brokerage and sift through thousands of mutual funds.
Youre also impatient and want to start saving now, not later this year when the myRA launches.
Here are two ways to get something similar to the myRA right now.
1. Sign up for TreasuryDirect and buy Series I US Savings Bonds.
Like the myRA, you can buy these in small increments and they earn pretty good increments.
Unlike the myRA, theyre not tax-free: youll pay federal income tax on the interest (but not state tax). And theres a small penalty for withdrawing in less than five years.
2. Open a Roth IRA at your bank or credit union.
Many banks allow you to put a savings account in an IRA. Ally Bank, for example, has an online saving account paying 0.87%, and you can stick it in your Roth IRA.
(Note: Im an Ally customer.)
Ready, save, outgrow
A savings accountlike fund, even with an interest-rate boost, isnt appropriate for your entire portfolio over your entire investing career. But when youre starting out, its fine.
The growth of your money in the early years of saving is determined much more by your savings rate than your investment performance.
Perhaps the $15,000 cap on the myRA will give savers a goal. I want these training wheels off as soon as possible, but let me fill this penny jar first.
Okay, Im not sure how you put training wheels on a penny jar, either, but you get the idea.