The process of saving and investing for retirement can be scary and confusing, especially if you don't have access to a retirement plan through your employer and don't feel prepared to choose and manage investments in a retirement account on your own.
If you haven't opened a retirement account for these or other reasons, you're not alone. According to a May 2015 Federal Reserve report, 31 percent of non-retired Americans don't have any retirement savings or a pension. In an effort to encourage people to begin saving, the U.S. Treasury Department has launched myRA, a new kind of retirement account. Here's what you should know.
What's different about myRA?
The myRA is meant to make it easier and more convenient for people who don't have employer-sponsored plans to save for retirement, according to an article personal finance writer Jonnelle Marte published by The Washington Post. The account allows consumers to set up automatic contributions that can be as small as a few dollars --no minimum balance required. It's aimed at helping people who may find it more difficult to save for retirement, like low-income workers or people who don't have access to a retirement savings plan at work.
With myRA, there are no fees and your investment is both low-risk and backed by the U.S. government. The account is designed to help you develop a savings habit, which may prepare you to save more later.
How does myRA work?
According to the myRA.gov website, myRA is a Roth IRA retirement account and subject to the same general tax rules. With Roth IRAs, your contributions (what you put in to the account) are made after-tax. This means you get the benefit of them not being taxed when you withdraw them from the account (though note that any earnings that are generated from your contributions may still be subject to taxes or penalties, depending on whether or not they're "qualified" under IRS rules).
There are differences, however, between myRA and typical Roth IRA accounts. The money in a myRA is invested in U.S. Treasury savings bonds, whereas contributions to a Roth IRA from a private-sector provider can generally be invested in a broader mix of stocks, mutual funds, ETFs, corporate bonds, or government bonds, which include U.S. Treasury bonds.
The money you put into your myRA account earns interest at a variable rate equal to that of investments in the Government Securities Fund. Standard, private-sector Roth IRAs have the capacity to earn more through higher-risk investments; however, your principal may not be protected and you could also lose money. Furthermore, you may have to pay investment management fees for a private-sector Roth IRA, which reduce its value.
You can maintain your myRA for 30 years from your first contribution or until your balance reaches $15,000, whichever comes first. When you reach either of these milestones, you will stop earning interest and must transfer funds to a private Roth IRA. To do this, you'll have to open a Roth IRA with a bank, brokerage firm or investment advisory firm, and transfer money to this new account.
However, you don't necessarily have to wait to accumulate the account maximum of $15,000. Jeff Rose, Certified Financial Planner™ and author of GoodFinancialCents.com, generally recommends making this transition as quickly as possible. He notes that: "Most brokerages will let you open an account with $3,000 and some with as little as $1,000."
By opening a private-sector account, you'll have the capacity to build your retirement savings to more than $15,000. This is important because you'll likely need to save much more for your retirement years.
Who's eligible for myRA?
myRA accounts are subject to the same eligibility rules as other Roth IRAs. Marte says that workers looking to open a myRA must have earned taxable income as defined in the IRS rules, but not beyond applicable earned income limits. In 2015, an individual had to earn less than $131,000 in modified gross adjusted income annually (the limit was $193,000 for married couples).
Should you choose myRA if you're eligible? It'll ultimately depend on your personal situation, but Rose says, "The myRA is a great choice for people who are very young or are working part-time." The low threshold for making contributions is "the biggest advantage of these accounts and should make them appealing to young adults and people who are very low income."
How does the myRA compare to a other retirement options?
The myRA is intended for workers who lack employer-provided retirement benefits, such as a 401(k), or who may otherwise find it difficult to save for retirement. This new account is not meant to be a replacement for an employer's plan, but rather to offer a way to get started saving for retirement if you don't have access to other affordable options. However, if you meet eligibility requirements, you may be able to save in both a myRA and other available retirement accounts that provide more flexibility in the types of investments you can have. Just keep in mind that there are different features and tax consequences amongst Roth IRAs, 401(k) accounts and other types of savings options, so it's important to understand the benefits and costs of your different choices.
If your employer doesn't offer a retirement plan and other retirement savings options are too costly or difficult, the myRA could be a good way to start saving for your retirement.
Rose says, "This is truly a starter account. We should not think of it as a long-term solution for retirement savings."
But helping you get started saving is the purpose of myRA. Since you don't have to meet account minimums, pay fees or make investment decisions, you may find that this account's simplicity places you on the path to saving for retirement.
Editorial Note: The opinions you read here come from our editorial team. While compensation may affect which companies we write about and products we review, our marketing partners don't review, approve or endorse our editorial content. Our content is accurate (to the best of our knowledge) when we initially post it, but we don't guarantee the accuracy or completeness of the information provided. You can visit the company's website to get complete details about a product. See an error in an article? Use this form to report it to our editorial team. For questions about your Credit Karma account, please submit a help request to our support team.
Advertiser Disclosure: We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.
Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.
Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.