In President Obama’s state of the union address on 28 January, 2014, he introduced a new retirement plan called the” My Retirement Account” (myRA). This new plan promises to provide investment opportunities for those workers who aren’t eligible to participate in an employer sponsored retirement plan. It is true a majority of Americans unnecessarily retire without savings; however, creating yet another complicated tax advantaged savings vehicle will not increase the number of Americans adequately saving for retirement.
While saving for the future appears intuitive, it really is not when you factor in all the complicated options the government has created to incentivize citizens to save for their own futures. While the following list is not exhaustive, it does give the reader some idea of how overwhelming it can be to choose the appropriate retirement savings account: 401(k), 403(b), SEP-IRA, SIMPLE IRA, Traditional IRA, Roth IRA, etc…
The rules for retirement planning are complex, and they are made even more so when politicians get involved. When some (but not all) Americans take advantage of the incentives in the U.S. tax code to save, politicians often respond with legislation to contend with the corresponding wealth inequality they helped create. To prevent “too much success” from saving, Congress imposes a variety of limits on how much a citizen can invest in different retirement plans based on participant incomes, participation in other plans, age, or how much participants earn from wages. Over the years retirement plan possibilities have grown numerous, and for many Americans, the choices and complexities have become paralyzing.
The myRA attempts to use the concept of “new” to inspire individuals to save for their retirement because evidently, the “old” plans haven’t inspired enough low and middle income wage earners to save. The Roth IRA, originally created by the Taxpayer Relief Act of 1997, is an ideal savings plan for low and middle income citizens, and it is offered by most banks, credit unions, brokerage firms, and insurance companies. Although Roth IRA’s are terrific, not enough Americans are taking advantage of them, and this is must be the inspiration for the myRA.
The myRA works a lot like the current Roth IRA. It is funded with after-tax dollars, and the earnings grow tax free. An investor can withdraw contributions out at any time without having to pay taxes or penalties, and after a person turns 59 ½, the earnings can be withdrawn tax free as well. The only difference I see between the myRA and the Roth IRA is the myRA will allow investors to invest in the “G” Fund, the government’s guaranteed cash option in the federal employees Thrift Savings Plan. The G Fund currently pays 2.2%, and although better than local bank savings rates, it still barely keeps up with inflation. Investors in MyRA’s will be allowed to participate until they: (1) accumulate $15,000; or (2) after 30 years, whichever comes first. At that time investors will be required to rollover their MyRA into a Roth IRA with some other private financial institution.
In theory, the myRA allows employees to invest contributions straight from their paychecks, just like a 401(k), 403(b), or SIMPLE IRA; however, many employers already allow their employees to direct deposit a portion of their paychecks into Roth IRA’s (many of my employer clients allow employees to do so). Additionally, the myRA allows employees to make small initial investments of $25, and additional contributions as low as $5 per pay period; but, most banks and credit unions (and some mutual fund companies) already allow contributions this low as well.
I think we need the myRA like we need another Rambo movie; instead, we need LESS retirement complexity. My proposal for getting increased retirement savings is for the government to simplify the current system by reducing the number of retirement savings accounts from several to two: (1) a traditional option funded with pre-tax dollars with earnings growing tax deferred; and (2) a Roth option funded with after-tax dollars with earnings growing tax free.
Under my proposal, a citizen who works for a company offering a 401(k), a 403(b) or a SIMPLE IRA would have his contributions deposited into either his traditional plan, his Roth plan, or both. Additionally, the citizen would also be able to make IRA contributions into either or both his two plans, subject to the contributions limits that already exist.
We live in an era where Americans change jobs multiple times throughout their working years. Rather than have two old 401(k) plans from two different employers and a small SIMPLE IRA with a current job, my proposal would allow Americans to take their portable plans from one employer to the next, reducing the red tape necessary to rollover old plans into IRA’s or new employer plans. Although the funds being deposited into the two plans would be subject to current contribution rules for the type of plan the investor is eligible to fund, reducing the number of retirement accounts would greatly simplify the retirement savings process and increase the number of citizens capable of understanding them.
Because myRA’s offer limited investment options and capped growth but plenty of government bureaucracy, I don’t see much value in them. We already have Roth IRA’s which are less bureaucratic and offer more options. The complexity of the myRA outweighs its benefits, and like many well intended programs offered to help the poor and lower middle class, I predict the myRA will produce results that are the exact opposite of what were intended.
Unless the government reduces the complexity of investing for retirement, America is not going to see an increase in retirement saving any time soon.