The Trump administration is winding down an Obama-era program designed to make it easier for lower-income Americans save for retirement.
The myRA program was supposed to offer a “safe and affordable” way for people who didn’t have a workplace retirement plan to save for the future. Participants signed up to have contributions withdrawn directly from their paychecks or bank accounts, which would then be invested in low-cost, risk-free government bonds. But a recent Treasury Department review determined the program is not “cost effective.”
Median myRA account balance: $500
Only 30,000 people have opened myRAs since the program launched in 2014. Just 20,000 people have contributed money to their accounts, which have a median balance of $500. So far, the government has spent almost $70 million to manage the little-used program.
“The myRA program was created to help low to middle income earners start saving for retirement. Unfortunately, there has been very little demand for the program, and the cost to taxpayers cannot be justified,” U.S. Treasuer Jovita Carranza said in a statement. “Ample private sector solutions exist,” which already meet the needs of savers, according to Carranza, limiting the appeal of the myRA.
The announcement of myRA’s impending death is bad news for Americans who signed up for the retirement saving plan. But there’s no reason to panic. Although this specific program is ending, there are still other (and maybe better) ways to save for retirement if your employer doesn’t offer a workplace retirement plan.
The problem with myRAs
- Accounts had a maximum balance of $15,000.
The myRA initiative was controversial from the start. Sure, the program had some advantages. There were no fees, you could make small contributions (as little as $5) right from your paycheck, and your money, while not earning much, was safe – a big positive for people who were nervous about investing. Plus, there was the hope that this new savings vehicle could help millions of lower-income people become more financially secure.
But despite some positives, there was plenty to dislike, too. Some financial experts criticized the lack of investment options because people could only invest in government securities earning a low return. Balances maxed out at just $15,000, at which point participants had to transfer the money to an account at a private custodian (say, Vanguard or Fidelity). Others warned of a “bureaucratic mess” for savers.
Then, there was the fact that it was essentially the same as an existing type of retirement account: the Roth IRA.
Roth IRAs: The basics
- You can contribute up to $5,500 a year.
Although they had a different name, myRAs were essentially “starter” Roth IRA accounts. The basic rules governing the accounts are the same. You make after-tax contributions up to $5,500 a year. You can withdraw your contributions at almost any time, though you’ll pay a penalty if you take out any earnings before retirement (except in certain limited circumstances). Once you reach age 59½, you can take money out tax-free.
The promise of tax-free retirement income is what makes Roth IRAs so appealing, according to Ed Slott, a retirement expert and founder of IRAHelp.com. Let’s find out more about these unique tax perks.
The perks of a Roth IRA
- You’ll pay 0% tax on your Roth distributions in retirement.
This point is worth repeating: You never have to pay taxes on any investment earnings in your Roth IRA. It’s not often you’ll get such a sweet tax deal from the government, and retirement pros say you shouldn’t miss out.
“You can’t beat a 0% tax rate,” Slott, author of Fund Your Future; A Tax-Smart Savings Plan in Your 20s and 30s, told The Cheat Sheet. “It’s likely that tax rates will increase in the future, and that means less for your retirement if you have to pay those taxes. With a Roth you don’t, but with a traditional IRA you’ll be stuck with that tax bill.”
The tax benefits make Roths especially appealing for younger workers. “The younger you are the better off you are with a Roth IRA because Roth IRAs grow tax free, and you’ll have more time for that Roth IRA to keep growing,” Slott said. “You won’t have to worry what future higher taxes might do to your retirement income.”
The myRA and the Roth IRA are very similar — though not totally identical — ways to save for retirement. If you have a myRA, you’re probably going to want to roll over your funds to a Roth, Slott said. If you don’t have a retirement nest egg yet and can’t sign up for a 401(k) at work, opening a Roth might be the best way to start saving. Here’s how to do it.
Can I open a Roth IRA?
- Only people earning less than $118,000 a year ($186,000 if married) are eligible.
Not everyone is eligible to contribute to a Roth IRA. If you’re single and earn up $118,000 a year, you can contribute as much as $5,500 a year ($6,500 if you’re over 50). Married couples filing jointly must earn less than $186,000. Those earning up to $133,000 (if single) and $196,000 (if married) can make reduced contributions.
You can put money in a Roth IRA (or a traditional IRA, for that matter) even if you’re contributing to a 401(k) or similar workplace retirement plan. The next step is deciding where to open your account. That’s where things get tricky for many people.
Choosing a Roth IRA provider
- Pay attention to fees and investment options when choosing a provider.
Most financial institutions, including banks and brokerage firms, let customers open a Roth IRA. Each provider has their own rules about how much money you need to open an account, charges different fees, and offers different investment options.
For example, Wells Fargo gives you the option of putting your money in a “Destination IRA.” You only need $100 to open an account, there are no account fees, and your money is FDIC-insured. But because your contributions are sitting in a savings account, they’re not going to be growing much either, meaning you’re missing out on one of the big advantages of a Roth: tax-free investment growth. Other providers might require a minimum deposit of $1,000 or more and charge fees, but you’ll also typically have more choices for how to investment your money and potentially earn bigger tax-free returns.
Which company should get your business? It depends on your goals, taste for risk, and other factors. NerdWallet rounded up what it thinks are the best providers here.
Once you’ve opened an account, the next step is getting money into it.
Funding your Roth IRA
- Save $458 a month to max out your contributions.
One big advantage of the myRA, especially for people who have trouble motivating themselves to save, was that money could be taken directly out of your paycheck, similar to a 401(k). For people who have a tendency to spend money as soon as it hits their checking account, having retirement savings go straight to their myRA was a real plus.
The solution is to set up automatic contributions from your checking or savings account to your Roth IRA. You can schedule these, so they sync up with when you get paid. It’s almost as if the money is coming right from your paycheck.
How much should you save? To max out your yearly contributions, you’d want to contribute $458.33 a month. Not everyone will be able to save that much, but any amount you can set aside is better than nothing.
Think your salary is too low to save anything? Think again.
Strategies for low-income savers
- Even saving $10 a week can help.
Ask Americans why they aren’t saving for retirement, and you’ll probably get a similar answer from everyone: “I’d like to, but I just can’t afford it.”
It’s true that setting aside money for a retirement that’s decades away is hard when you need to put food on the table and pay rent. But you might still be able to find some money in your budget for retirement savings.
For one, you should check first to make sure you’re not missing out on retirement savings incentives at work. If your company matches 401(k) contributions, you should take them up on the offer. Check with your HR department to find out about any benefits you might not be aware of.
Another option is to look for any wiggle room in your monthly spending. Is there a subscription service you never use? Are you buying lunch out three times a week? Make small spending cuts, and put the money toward retirement instead to get yourself in the saving mindset.
In the meantime, what should people who’ve already opened a myRA do? Read on to find out.
What if I have money in a myRA?
- Avoid a 10% penalty by rolling your money over to a Roth IRA.
If you do have money in a myRA account, you don’t have to do anything immediately. New enrollments have ceased, but for the time being existing accounts are open and are still accepting deposits. You’ll hear from the government soon about what you need to do to transfer or close your account. According to the Treasury Department, the phase out will take several months.
Eventually, however, you’ll need to move your money out of your myRA. Withdrawing your money entirely from the account is another option, but you’ll pay taxes and a 10% early withdrawal penalty on any earnings. Plus, you’ll lose out on future savings growth. Your best choice is probably to roll it over to — you guessed it — a Roth IRA.
“There is that temptation to simply withdraw the myRA funds and spend them, but my advice would be to roll those funds over to your Roth IRA and leave them there where they can keep growing tax free,” Slott said. “If you ever need to tap those funds you can, and the contributions you withdraw will be tax free.
“You can go to any financial institution, bank, fund company, or online institution, and do a direct rollover of your myRA funds to your Roth IRA,” Slott continued. “If you don’t already have a Roth IRA, they will set it up for you quickly, or you can do that yourself with some of the online institutions.”
A Roth IRA is a good alternative to the myRA, but is the government planning to do anything else to help low-income savers? A few states have a plan.
How the government can help
- Some states want to set up their own auto-IRAs
Many financial experts agree making retirement savings automatic is key to boosting account balances. If people have to opt-out of contributions, rather than opt-in, they’ll be more likely to save. That’s why some employers automatically enroll all workers in their 401(k).
Unfortunately, only 14% of U.S. employers offer a workplace retirement plan. Those who aren’t getting any retirement help from their employer have to go through the trouble of opening their own IRA (or until recently a myRA), a hurdle too great for many people.
To address the problems, several states have floated the idea of setting up automatic IRA plans for all workers. Oregon, California, Illinois, Connecticut, and Maryland have all passed laws requiring private employers to either enroll workers in a traditional retirement plan, such as a 401(k), or the state’s auto-IRA. So far, only Oregon’s plan has gone live. The trial phase of OregonSaves started in July 2017 and is set for a wider roll out in 2018.
The auto-IRAs have broad support, noted InvestmentNews, with both left- and right-leaning organizations praising efforts to get people to save more. But some in the financial industry have pushed back, saying the plans are bad for investors and will reduce competition. In January, President Donald Trump issued a resolution to get rid of an Obama administration regulation that supported such state-developed plans.
We’ll have to wait and see whether this new generation of retirement plans takes hold. In the meantime, most people are still on their own when it comes to figuring out how to save for retirement.