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myRA? What’s the point?

Image courtesy of stockimages at FreeDigitalPhotos.net

Image courtesy of stockimages at FreeDigitalPhotos.net

After the President’s state of the union announcement of the new myRA account, my first reaction was: Did we need this?  What’s so “out of reach” about a regular Roth IRA?  And if there was a great hue and cry for this, why hasn’t the marketplace provided it already?

After all, there are custodians who will provide a no-fee Roth IRA with no account minimum already (TD Ameritrade comes to mind). Plus, there are plenty of ways to get a bond-like return with no costs or account minimums as well.

All that I can find that is different about the myRA accounts is that the bond investment (same as the TSP “G” fund) has downside protection – meaning that the funds in the myRA account will never reduce in value, only grow or stay the same.

As with any gift (and downside protection is indeed a valuable gift), there is a cost associated with it.  Think about it: bonds fluctuate in value day in and day out, year in and year out.  If the value of the bonds decreases, somehow the investor’s dollar has to remain constant.  The only way to do that is to have other funds available to hedge the value fluctuations, and someone has to provide those funds.  Since these myRA accounts have no fees associated with them, the investor isn’t paying for the hedge. I KNOW! How about all taxpayers foot the bill?!

One other difference with the myRA is that the intent is to have this available via widespread employers – at no cost to the employer – via payroll deduction.  First of all, there is cost associated with making changes to payroll.  Adding in a new deposit destination doesn’t just happen automatically, someone has to take action to set it up – and that costs money.

Other than those two facts, all of the remaining features that I’ve been able to read about are exactly the same as a Roth IRA – contributions are not tax deductible, withdrawals at retirement age are tax free, withdrawal of contributions can be done without tax or penalty at any time, and the account can be rolled over into a Roth IRA at any time (myRAs must be rolled over when the balance grows to $15,000, or a maximum of 30 years from initial investment).

From my perspective the myRA is only going to complicate matters more than they already are.  Folks who had the desire to save money in a Roth IRA were already figuring out how to do it on their own.  Having this additional option is (I believe) destined to the same result as the Coverdell ESA – great idea, but there are too many alternatives already in place with 99 44/100ths percent of the same features.

Far be it for me to disparage attempts to help people save more.  I spend a lot of time encouraging folks to do just that, all the time.  I suspect that the myRA will likely do not much more than just confuse folks who know someone named Myra (I knew a Myra when I was a kid, she was our pastor’s wife and she taught my sister to play the piano).  She was a very nice lady and an excellent piano teacher, but if she did anything to promote retirement savings, it was lost on me.

4 Comments

  1. JR in MichNo Gravatar says:

    No, you said it right the first time Jim, this will only confuse matters and we are, again, trying to giving something for nothing with the taxpayers to be stuck with any “downside protection”. It’s not good to teach people that investing carries NO risk.

    1. jblankenshipNo Gravatar says:

      You’re right about that – this is sending a distorted signal to folks who can ill afford to misunderstand things.

      I had a note from someone else who pointed out two other negatives:

      First, while the TSP “G” fund might protect the saver against downside risk, historically the fund’s rate of return has not kept up with inflation…hardly a good vehicle to prepare for retirement.

      Second, the myRA plan will require that savers liquidate their account when it reaches $15,000. This is not a meaningful amount for anyone to fund their retirement. Further, there is no penalty if those funds are not rolled into another retirement plan; so many will be tempted to spend it before reaching their retirement years.

  2. EvelynNo Gravatar says:

    I’ve followed your blog for a long time and usually learn something – thats always good. A very good reference – I subscribe to the RSS so I don’t miss your writings.

    However, this post really discourages folks from saving/investing for retirement. The folks that will be using a MyRa aren’t reading blogs from financial planners, or other financial/retirement websites. They surely won’t have a brokerage account. These are the folks that you won’t be encouraging to save more – they might not be fortunate enough to earn/have enough money in their lifetime that the thought of a financial planner would cross their mind.

    The point of a MyRa is it takes meaningful steps to encourage saving for the other options you noted, i.e. Roth IRA and/or other retirement plans. As the description says – “simple, safe and affordable starter retirement savings account”.
    For someone who has never invested – nothing confusing about it. The employer will offer you a simple payroll deduction $5 – $10 a month. These are the amounts folks who have lower wages, are in debt, often have dead-end jobs,etc. could possibly not only be encouraged, but gain a feeling of accomplishment by investing a small amount.

    Disparaging attempts to encourage people to save – unfortunately this post kind of does that. But then maybe it depends on the population.

    ev

    1. jblankenshipNo Gravatar says:

      I certainly didn’t intend it to come across that way, but I can understand your point of view.

      I guess we’ll just have to wait and see if this gains any traction – and if only a few people actually take advantage of it, that’s a few people that will have helped themselves in saving toward retirement, which is a good thing.

      Thanks for your comments – I appreciate it a lot.

      jb

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