In his recent State of the Union speech, President Obama introduced a new program of retirement saving for the 50% of Americans that do not currently have employer-funded retirement plans. This MyRA, as it is called for “My IRA”, allows workers to contribute up to $15,000 in a starter-saving plan that exclusively uses government Treasury Bonds. The accounts offer guaranteed principal, tax-free withdrawals of principal and no fees. Couples with an adjusted income of $191,000 or less and individuals with $129,000 or less may contribute after-tax a maximum per-year of $5,500 or $6,500, if older than 50. Once the account reaches $15,000, principal can be transferred to a traditional IRA or withdrawn without penalty for other uses. Any growth earned in the account will face a 10% withdrawal penalty if taken before age 59.5. Self-employed workers are not candidates for these accounts.
As a way to encourage saving for those workers who currently are not offered another vehicle, the rates of return on the bonds are running at an average of 3.6%, which is superior to standard bank savings accounts or CD’s. Other incentives for using the MyRA as a short-term saving plan include the fact that the principal is guaranteed, there are no fees and no withdrawal penalties on principal. This could encourage workers to get in the habit of automatically deducting contributions directly from a paycheck for savings or used as a potential way to accrue a home down-payment or emergency fund. It requires little to get started – $25 initial minimum, and then allows deductions of as little as $5 per paycheck. Also, because the Treasury Bonds are the only investment, there is no education or decision-making required. Workers can easily transfer their account from employer to employer, either for full-time or part-time jobs.
The detractors maintain that this is simply a new market for buying Government bonds to fund overspending and to unload the Treasury Bonds purchased under the Obama administration’s recent policy of “quantitative easing”, where the Fed has purchased large amounts of Treasury bonds to help contain interest rates and encourage growth. Also, rising interest rates would have a major negative effect on the value of 30 year bonds. Others point out that this program is inadequate to overcome the estimated $6-8 trillion in retirement saving shortfalls and that concentration should instead be on fixing Social Security. There are no tax deductions for these contributions and the government gets to use your money and keep it from being invested in higher-earning choices. Also, employers are not required to offer this plan and it is unclear how the program will launch at its predicted start-date at the end of 2014.
There appear to be some benefits to using this as a short-term savings plan and it may act as an incentive to encourage personal savings, but it falls far short of the intended fix for under-funded retirement accounts and is an unlikely fit for most DWM clients. It provides little tax benefits and the only investment option, long-term treasury bonds, is not a good one. Further, it can certainly be argued that the spotlight should be on fixing the other government-sponsored and non-voluntary retirement savings program – Social Security.