In his State of the Union address in January President Obama introduced a new retirement account type called MyRA (My Retirement Account). It’s designed to allow individuals to invest small amounts of money ($25 to start, $5 minimum contributions thereafter) into a retirement account similar to a Roth IRA except that it invests in U.S. Treasury Bonds instead of stocks/mutual funds. Like a Roth IRA, all contributions are from after-tax dollars, meaning you won’t pay taxes on your distributions when you retire. The current annual contribution limit for Roth IRA’s ($5500) also applies to the MyRA. Since it is set up as a Roth, you cannot contribute to both a separate Roth IRA and the MyRA at the same time.
Once your MyRA’s account balance hits $15,000 (about 2.75 years of investing if you contribute the max) or the account is active for 30 years (which ever happens first) you must roll the account into a regular Roth IRA where you will then have the freedom to invest in better investments such as stocks/mutual funds.
The money you contribute to the MyRA is invested in the “G” Fund from the federal government’s Thrift Savings Plan (similar to a 401k) and you are limited to just that fund. The “G” Fund has average annual returns of:
1 Year: 1.47%
3 Year: 2.24%
5 Year: 2.69%
10 Year: 3.61%
Since fund inception (April 1987): 5.69%
While there is a guarantee that you will never lose your principle, the average annual returns are not nearly as good when compared to the stock market. Take the “C” Fund for example which is included in the TSP for federal employees but will not be available for the MyRA. The “C” Fund is an index fund that invests in the 500 companies that make up the S&P 500, a popular index to compare investment returns to.
1 Year: 16.07%
3 Year: 10.90%
5 Year: 1.71%
10 Year: 7.12%
Since fund inception (January 1988): 9.50%
As you can see, the “C” Fund as performed quite better than the “G” Fund. However there always exists the possibility of recessions, bear markets, and crashes such as in 2008-09 where the S&P 500 declined considerably but the “G” Fund held its value and continued its slow growth.
In conclusion while I think the MyRA is a good choice for those individuals who have no retirement savings at all or work at jobs that don’t offer 401k’s, for the majority of people I don’t think it is the best choice. Unless all you have is the $25 to open an account and low amounts like the $5 a week to contribute you are probably better off just opening a regular brokerage Roth IRA account through a company like USAA, Vanguard, etc. This will allow you to have a larger variety of options to invest in such as individual stocks, index funds, and managed mutual funds.
I think the best thing to come out of the President introducing the MyRA was that it brought a lot of attention to retirement savings in the media and hopefully to many citizens here in the U.S. I think a potential negative to the low contribution requirements could be that people get used to “only” contributing small amounts and believe that this will be enough to retire on, without focusing on better controlling their expenses and thus, investing more. If people realize that it truly is just a starter account to save up $15,000 in order to invest in other retirement investing vehicles and use it in that manner, than I think it will be successful program.
What are your thoughts on the MyRA? Do you plan on contributing and if so what are your plans for after you save up the max of $15k? Please leave a comment below and continue the conversation. Thanks for reading.