The federal government understands better than anyone else that the financial challenges facing Social Security and Medicare as well as low retirement savings for millions of Americans should be addressed as soon as possible. Almost a week ago, a new retirement savings account, the myRA (my retirement account), was launched nationwide with one simple goal: to create a savings habit and stimulate people to save more. As you will see, the myRA has its limitations and is not intended to replace other retirement plans. Its sole purpose is to get you started.
What is the myRA?
myRA is the government-guaranteed retirement plan that is aimed to help workers who don’t have access or are not eligible to participate in a retirement plan through the employer. In fact, even if a person has an IRA account or participates in a 401(k), he or she can still participate in myRA.
The account is easy and free to open and has no fees or account minimums. Just go to the myRA website and sign up there. However, be aware that the myRA is subject to income limits. If you are single, head of household, or married filing separately than your modified adjusted income (MAGI) must not exceed $131,000 in order to open the account. For married couples filing jointly MAGI must not exceed $193,000 2015.
Once the account is opened, the funds will be invested in a United States Treasure savings bond and will earn the same rate as investments in the Government Securities Fund for federal employees. The earned return for these investments in 2014 was 2.31% and 3.19% average annual return over the 10-year period ending December 2014. Certainly, it is less than one can expect from investing in stocks, but it is much better than simply keeping money in savings account, which have an average interest rate of 0.06% according to FDIC.
Additional features of the myRA:
- It is SAFE – The investment is backed by the federal government
- It has a Roth IRA structure – qualified distributions from the account are tax-free and no required minimum distributions
- Saver’s tax credit – single filers with earnings below $30,500 or $61,000 if married filing jointly for 2015, may be eligible for a saver’s tax credit
- Contributions can be withdrawn tax-free and without a penalty at any time. However, interest earned is subject to certain restrictions
There are three ways to contribute to the myRA:
- From paycheck – complete the Direct Deposit Authorization form and pass to the employer
- From a checking or savings account – link bank account to myRA and use it to make recurring or one-time contributions
- From federal tax refund – use the “Savings” box of your tax return to specify how much of the tax return you want to put into myRA
- Annual limit is $5,500 + $1,000 catch-up contribution if older than 50
- myRA is limited to a $15,000 cap or 30 years, whichever comes first. Once one of these limits is hit, the account will automatically be transferred into a private sector Roth-IRA
- Contribution deadline: April 15 of the following year
Note: A non-earning spouse can also participate in myRA and is subject to the same limits. Make sure your married filing jointly MAGI is below $193,000 for 2015.
Advantages of the myRA for Small Business Owners
If you are a self-employed or a small business owner whose business hasn’t matured yet, myRA is a great starting tool to help you and your employees save for retirement.
The key advantages of the myRA account are its simplicity and affordability. There are no costs associated with opening and maintaining the account and no administrative hassle common to a 401(k) plan. That means no annual Form 5500 filing, no discrimination testing, and matching contributions. While the lack of matching contributions is hardly a competitive advantage, investments in myRA are backed by the U.S. Treasury and have no risk of losing money. With myRA, you as the employer, can do your share and stimulate employees to save for retirement by setting up an automatic direct deposit contributions to their myRA accounts through payroll deduction.
Another important feature of the myRA account is that the employer is not subject to ERISA requirements, including fiduciary responsibility. That means that promoting the myRA and encouraging employees to participate in it will make you look good and signal them that you indeed worry about their retirement and financial wellbeing.
Finally, even if you already have a retirement plan, there always be employees who are not eligible to participate in it (due to statutory or nonstatutory exemptions). Consider part-time workers, who would like to save for retirement but will never meet the eligibility requirements of your plan. myRA could be a good option for them to save for retirement and you, as the employer, can be the one who expressed concern and pointed their direction. It’s a win-win.