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Is the New myRA Retirement Savings Account Right for You?

Soon many employees will have access to a new type of retirement savings account, the “myRA”. President Barack Obama introduced his proposal for this new plan to the public during his State of the Union Address earlier this year. The Treasury Department recently began to take applications to open myRA accounts at: https://myra.treasury.gov/individuals/.

The myRA has familiar features to other retirement accounts, but operates according to its own set of rules.

Income Limits. The accounts are available to individuals who earn up to $129,000 and couples who earn up to $191,000. If your income exceeds those limits you really should be investing in traditional retirement plans regardless of this rule. Individuals whose adjusted gross incomes do not exceed $30,000 and couples whose adjusted gross income is no greater than $60,000 may be eligible for a tax credit on their federal income tax returns of between 10% and 50% of their contributions.

Taxes and Penalties. Contributions are made to myRAs after the funds have been subject to federal income tax. Therefore, like a Roth IRA, distributions of invested funds, as well as distributions of investment gains and income, will not be taxed. MyRA accounts are more flexible than Roth IRAs because a participant can withdrawal his or her contributions (but generally not earnings) before age 59½ without having to pay a 10% penalty for early withdrawals.

Investment Options. The funds contributed to a myRA are invested in Treasury Bonds. Treasury debt yields very low interest rates, so these accounts are designed for jump-starting saving with the intent that the participants will in time transfer the funds to a private IRA. IRAs have many more investment options that can be geared toward the goals of the individual participant. In fact, when the balance of a myRA account reaches $15,000, it must be rolled over into an IRA.

Designed for Beginning Savers. There are several reasons why an employee who does not have access to a 401(k) would open a myRA. The tradeoff for the low return on investment in these accounts is that they have no annual account maintenance fee, can be opened with as little as $25 and allow a participant to make subsequent contributions as small as $5. It is difficult to find a private company that permits Roth IRA accounts to be opened for less than $1,000, and even if an account can be opened, the fees involved in created and maintaining a Roth IRA are difficult to justify for an account so small. This is where the myRA plan may make sense. Employees who can start small should just get started. We all know that even small investments can make a big difference in retirement

In addition to the rules discussed here, myRA accounts have contribution limits, which may be affected by your other retirement accounts, and other issues that you need to consider before opening one. If you have additional questions about retirement plans or any tax issue, please contact us.

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