Many economists believe that one of the big financial “ticking time bombs” in the U.S. is the fact that current levels of retirement savings are very low, and that the Social Security retirement program – which was never intended to be the primary source for an individual’s long-term retirement income – is under stress.
In an effort to get more people saving, the President in his 2014 State of the Union Address proposed the creation of a new retirement savings vehicle. This new account structure has tentatively been designated the “myRA” (short for “My Retirement Account”).
While it’s still likely to be a little while before these types of accounts become available, it can be useful to take an initial look at what they might be like.
Available to All Workers. The myRA is meant to fill a need for low and middle income individuals who don’t have access to employer-sponsored retirement plans. Recent statistics show that this includes approximately half of all workers in nation, and 75% of those who work part-time. The myRA plans will also be available to individuals who are currently covered by a 401(k) or other employer-sponsored plan, provided that their household income does not exceed $191,000 per year.
myRA Account Basics. The myRA will most closely resemble a Roth IRA for tax purposes, which means that contributions will not be tax deductible, but all withdrawals from the account during retirement can be made on a tax-free basis. Individuals can also withdraw their contributions at any time without penalty, but withdrawals of earnings before age 59½ will be subject to taxes and potentially also an early withdrawal penalty. Furthermore, the current plan is for the myRA to be free of any fees or costs to the saver.
Investment Choices. In short, it’s not anticipated that there would be any investment decisions for account holders to make. Account funds will be invested in fully guaranteed government savings bonds, so there is zero risk of loss of the savers contributions. This may be a plus for those who do not want to make investment decisions or fear declines in their account balances, but it may be a negative for individuals who are comfortable making their own investment decisions.
Adjusting Tax Breaks for High Income Savers. But it’s perhaps another aspect of the myRA concept that’s likely to be the most contentious. Part of the current proposal would reduce some of the tax breaks that currently go to the highest income households. (The current data indicates that nearly 70% of the current retirement savings tax benefits go to the top 20% of the earners, with approximately half of those benefits going to the top 5%.)
The reasoning behind this proposed adjustment is that because many of these households would still have made the same retirement savings even without the tax breaks. The myRA proposal would cap those tax benefits (at 28% of the value of the deduction), and would limit contributions to tax-advantaged accounts once the balance reaches a particular amount (the current proposal is to cap at approximately $3.2 million).
Because retirement savings is such “hot button” issue, any changes to the landscape – particularly changes that affect the tax implications of saving – are likely to be well-contested and subject to many changes before they become law.
Tags: myRA, retirement advice, what is a myRA
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Many economists believe that one of the big financial “ticking time bombs” in the U.S. is the fact that current levels of retirement savings are very low, and that the Social Security retirement program – which was never intended to be the primary source for an individual’s long-term retirement income – is under stress.
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