Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

March 21, 2014

President Barack Obama announced in his State of the Union Address at the end of January, the formation of a new retirement plan option which will likely get started towards the end of 2014. The account type, dubbed “myRA” (pronounced “My R.A.”) is short for “My Retirement Account.”  Despite a plethora of retirement plan options already available, one might ask, do we need yet another option to complicate planning?  Despite all of the options available, roughly one third of employees in the United States still do not contribute to any type of retirement plan.  Another third participates in an employer sponsored plan, and roughly the other third has an employer sponsored plan and some type of IRA as well.  In a survey conducted by the Employee Benefit Research Institute, 57 percent of Americans say they have less than $25,000 in total savings (excluding the value of their house or defined benefit plans).

The point of the myRA is to help make it more accessible for the bottom third of savers to work on saving for retirement.  My analysis is that in its current form, it may mildly assist in this manner, but could be used by more savvy investors as a way to access, to a limited extent, the G-Fund, a solid short-term investment option only available to people with government sponsored TSP programs.

The problem with myRAs is that they do not automatically enroll employees upon initial employment.  This has been a desire of the President, but would require Congressional action.  The goal of automatic enrollment would be to make it the default option, unless the employee deliberately opts out of the program.  Without automatic enrollment there is very little reason to believe employees would be more likely to join these plans than ones already offered by employers.  That said, many small employers currently do not offer plans to employees due to the added expense of operating and/or contributing to the plan, and most of them exclude a lot of short-term or part-time employees.

The myRA would have a very low entry point – with only a $25 opening contribution by an employee, no fees or requirements for the employer to contribute, and a $5 per paycheck minimum contribution, it is theoretically much more accessible, especially for short-term and part-time employees.  The plan would also be portable from one employer to the next, helping to reduce “retirement plan trinkets” – my term when people carry around a half dozen retirement plans from all their former employers.  The program would be administered by the federal government, and since it would have only one investment option, there should be a lot less questions and hassles to set up.  The employer would simply direct a portion of the employee’s direct deposit to the government, instead of  the employee’s bank account.

The lone investment option is the Thrift Savings Plan offered G-Fund – Government Securities Investment Fund.  This fund invests in United States government securities and its goal is to outstrip inflation but is also guaranteed by the full faith and credit of the United States government.  Its guaranteed return is the weighted average of all outstanding Treasury notes and bonds with a four year or longer maturity.  So effectively you get a long-term rate, even though your investment could be short-term.  Since 1987 its average return has been 5.4 percent per year.  In 2013 it returned 1.89 percent – not fantastic, but much better than most short-term investments available today, and with no risk.

One of the key characteristics of a myRA is that it is effectively a Roth IRA.  This means you get no tax benefit for putting money into the account, but it grows tax-free forever, has no required minimum distribution when you turn 70 1/2, and there is no tax on the principal or earnings when you withdraw it in retirement.  Like a Roth IRA, f you need to take money out sooner, you can take out your original contributions with no penalties (but not earnings).  The same income phaseouts for Roths apply to myRAs as well – you must have adjusted gross income less than $129,000 filing Single, and $191,000 Married Filing Joint ton contribute.  In addition,  the same aggregate IRA contribution limits ($5,500 for people under 50 and $6,500 for people over 50) will apply for all IRAs, including your myRA.

A key provision with a myRA is that once the account balance hits $15,000 (or 30 years) it is automatically converted to a regular Roth IRA.  However, people can rollover funds from a myRA to a regular Roth IRA at any time to keep their balance below $15,000.  I could see this used by people who like access to the G-Fund as a safe, possibly, short-term investment that provides a decent rate of return.

Personally, I think we need to consolidate and simply our retirement plan options, and not create more animals to supervise.  But for now, the tax code continues to grow more complex – benefitting some, and making things more confusing for most.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.