Similar to a Roth IRA, the myRA accounts will allow workers to invest money after tax and withdraw the money in retirement tax-free. Unlike a Roth IRA, however, the savings will be backed up by U.S. Treasury bonds, so investors will have a safer investment alternative designed never to risk the principal investment. The accounts, which are voluntary, will be available to married couples with modified adjusted gross incomes up to $191,000 and to individuals earning up to $129,000.
Workers can open a myRA with a minimal initial $25 investment. The plans are funded through paycheck deductions with contributions as small as $5 at a time. Savers will earn variable interest on the accounts, and there are no fees on the account. Principal contributed to the account can be withdrawn without penalty at any time. There will be a penalty, however, for withdrawing the earnings i.e., interest, from the account before age 59 1/2.
Once an account holder has accumulated $15,000, the account holder must roll the account into a traditional Roth IRA, which will then be subject those rules. In addition, the accounts last only 30 years, so at the end of that time the funds must be rolled into a traditional Roth IRA, even if the $15,000 maximum limit has not been reached. It is unclear whether an account holder can open a new account after a period of time in order to avoid contributions being rolled up, and subject to traditional Roth IRA withdrawal rules.
Employees who switch jobs will be able to keep their myRA accounts without cashing them out. Workers would also be able to contribute to the same account from multiple part-time jobs. The new accounts will initially be offered through a pilot program with employers who choose to participate and should be available at the end of the year.
Critics contend that the myRA initiative will do little to address the retirement savings gap because enrollment will not be automatic and contributions will be invested only in low-return Treasuries. The requirements that the myRA rolls up into a traditional Roth IRA at either the $15,000 limitation or upon thirty years is at best going to create confusion. At worst it will cause account participants to mistake the flexibility and ease of the accounts prior to roll-up in planning, and fail to carefully consider the more cumbersome rules governing Roth IRA distributions after roll-up. Unexpected tax consequences may follow.
The reason that "simple" is deceiving is the rules that define a qualified distribution. To be qualified, the distribution MUST be:
- Made on or after the date you become age 59 1/2; OR
- Made to your beneficiary, or to your estate, after you die; OR
- Made to you after you become disabled within the definition of the IRS code; OR
- Used to pay for qualified first-time homebuyer expenses.
But, even if one of the qualifications above are met, the distribution is STILL not qualified if it is made within a five-tax-year period. Complicating matters further is that tax-years are NOT necessarily the same as five calendar years.
So, in effect, there are two sets of rules that must be met before a Roth IRA distribution becomes qualified, and therefore tax-free: The distribution rules and the five-tax-year rules. Unless both sets of rules are met, the distribution will NOT be qualified, and the earnings will be subject to tax, and possibly penalties.
The direct investment in treasuries may be a safer alternative for many investors, and it will benefit the treasury by encouraging direct investment. But, is the myRA an example of the government giving with one hand only to take with the other? Perhaps, only time will tell.
For the press release detailing the new myRA account, click here.
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