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myRAs Are an Easy—but Limited—Way to Start Saving

Quick Summary

  • myRA is a government-run retirement plan that helps people save for retirement with an account that has no fees, no minimum balance and no risk of losing money.
  • There is only one investment choice in a myRA: a U.S. Treasury-backed security
  • myRAs are meant to be a kind of “starter” Roth IRA. When the account grows to $15,000, you must move it to an IRA plan held at a private sector bank or brokerage firm.

Introduction

myRA is a new kind of retirement plan. myRA is designed to help people who aren’t covered by retirement plans at work and haven’t saved much for retirement. myRAs have no fees and no minimum balances.

There are two important differences between a myRA and other kinds of retirement plans—for example, Roth IRAs, Traditional IRAs and 401(k)s.

  • With a myRA, you invest only in a retirement savings bond backed by the U.S. Treasury. The accounts have averaged 2.63 percent in earnings over the past 10 years. You will probably earn less over time in a myRA than you would if you invest in stocks and bonds through another kind of retirement plan. But your account is guaranteed not to lose money.
  • Because a myRA is meant to be a starter retirement account, you must move the money to an account like a Roth IRA, held at a private-sector bank or brokerage such as Fidelity after 30 years or when you reach $15,000 in savings.

One of the advantages of a myRA account is that you can withdraw the money you deposit at any time. It can also be used for short-term savings, such as an emergency fund, or for a first-home purchase. Some savers who already have retirement plans may see myRAs as good accounts for emergency savings because interest rates currently paid by banks are lower than the returns they are likely to earn in a myRA.

In this article, we will cover the answers to other questions about myRAs:

  1. Who Is Eligible to Open a myRA?
  2. What Are the Contribution Limits?
  3. How Do I Sign Up?
  4. What Are the Investment Choices?
  5. How Much Will I Earn?
  6. What Are the Tax Breaks on a myRA Account?
  7. What’s the Bottom Line?

Who Is Eligible to Open a myRA?

myRA accounts are designed for people who don’t have access to 401(k) plans or other employer-sponsored retirement plans. But anyone who meets the income criteria can open one. For 2017, individuals who earn less than $133,000 a year or couples who earn below $196,000 a year are eligible.

What Are the Contribution Limits?

There is no minimum amount to start an account and you can deposit funds in any amount until you reach the annual contribution limit.

myRA accounts are technically Roth IRAs, so they fall under the same rules. If you’re under 50 you can deposit up to $5,500 a year. If you are 50 or older by the end of the year, you can deposit up to $6,500. Those are the total combined annual contribution limits for all your IRA accounts, including any Traditional IRAs and Roth IRAs you may also hold. Once the account grows to $15,000, you must move your money to a private-sector retirement account like a Roth IRA.

How Do I Sign Up?

To sign up, you go to myRA.gov. You’ll need a Social Security number and either a driver’s license or a state or military identification number or U.S. passport. You’ll also need to decide your beneficiary. Who will get the money in your account if you die?

To deposit money, send a check. If you want contributions to be deducted from your paycheck, give a direct deposit form to your employer. myRA does not charge fees to your employer for making direct deposits.

You can also direct your federal tax refund to be deposited in your myRA account by checking a box on your tax return.

What Are the Investment Choices?

It’s simple: There’s only one. The money in your myRA account is invested in a U.S. Treasury security.The fund earned a variable interest rate of 1.82 percent in 2016, compounded daily. The return is at the same rate as investments in the Government Securities Investment Fund available to federal employees through the Thrift Savings Plan.

The upside of this investment choice is that your money is guaranteed. Unlike investments in stocks or bonds, you can’t lose money.

The downside is that your returns, over time, could be lower than if you invested in stocks and bonds.

What Are the Tax Benefits of a myRA Account?

As with a Roth IRA account, investment gains and withdrawals are tax-free [this is not true of withdrawals from a Traditional IRA or 401(k)]. Most experts say Roth IRAs are good for younger savers, who are likely to be in a lower income tax bracket now and will benefit from the tax-free withdrawals later, when they are in a higher bracket.

However, unlike a Traditional IRA or 401(k), the contributions you make to your myRA account do not reduce your taxable income. As with a Roth IRA, you are contributing post-tax dollars.

One excellent exception: Depending on your income, your myRA contributions may make you eligible for the Saver’s Tax Credit, which can be worth as much as 50% of the first $2,000 deferred by each account holder.

You can withdraw any of the money you have contributed to a myRA without paying taxes or a penalty. But if you withdraw any of the interest that money has earned, you owe taxes on that interest. Interest or earnings withdrawn before the account owner reaches age 59½ are subject to income taxes and a 10 percent early withdrawal penalty.

What’s the Bottom Line?

If you’re a beginning retirement saver, this is an easy, free to start saving and investing. You can get a better return and more flexibility elsewhere, but starting to save for retirement is one of the best decisions you can make.

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