myThoughts: myRA vs. Roth IRA

Tuesday night President Obama mentioned in his speech about creating a new savings vehicle called “myRA.”  The purpose of the President’s executive order is to create an incentive for people to start saving. There are other accounts that encourage saving, including what myRA’s are compared to, Roth IRA’s. So why do this? Well, there are many people out there who haven’t saved much, lost a lot in their 401(k)’s, and/or do not see the value of saving money when all you can get is 1% on CD. As a country we spend the most of our income which makes us bad savers. A deadly combination when preparing for retirement. Study after study published says that many people do not feel that they are prepared for retirement. If you’re confused about where to start, Matt Becker does a good job in this post about how to start saving and how to start investing. When people are not prepared for retirement they will rely heavily on social security and tight spending. In other words, prepare for senior citizen discounts and early bird specials (Del Boca Vista anyone?). Let’s compare the two different vehicles.

myRA

1. Purpose:
   • To encourage those to save who do not have access to an employer sponsored plan (i.e. 401(k), 403(b), etc.)
2. Pros:
   1. As low as $25 to open an account (most other accounts require higher minimums like $1,000) and $5 ongoing contributions
   2. No cost to employers to offer them like it does to offer 401(k)’s
   3. Only one fund to choose from which pays a variable rate (Government Securities Investment Fund)
   4. Essentially, no potential to lose money
   5. No expenses to pay for the fund or the account
3. Other Notes:
   1. Can contribute up to $15,000 total, after that it will need to roll over to a privately managed IRA
   2. Money invested are after tax dollars
   3. Money withdrawn will not be taxed but will have the same guidelines as Roth IRA’s
   4. Similar income phaseouts to Roth IRA’s (include phaseout ranges here)

Roth IRA

1.  Purpose:
   1. To encourage savings for retirement with after-tax dollars
2. Pros:
   1. Can contribute $5,500 per year ($6,500 for those 50+)
   2. Money withdrawn at retirement (59 1/2 or older) is not taxed
   3. Unlimited investment options (subject to the brokerage company)
3. Other Notes
   1. Initial contribution are about $1,000 (subject to the mutual fund minimums)

myThoughts

I see this as another avenue for people to save. If it gets them to stock away a few extra dollars then how can it be a bad thing? Will it save people from poorly planned retirements? No. The contribution limit sets a ceiling that isn’t very high to make a big impact. What it does is creates an avenue for lower income individuals that have not currently saved to start. And who knows, maybe people who open these accounts up will enjoy it so much that they’ll start saving more into other retirement buckets.

Are they better than Roth IRA’s? Not in the sense of planning for retirement. Roth IRA’s are a great way to grow your retirement especially if you plan to live off more income at retirement than you currently do. They also allow for more contributions which will always trump a vehicle that has limitations like myRA’s.

Overall, I think it’s a good step for the administration by encouraging people to start thinking about their futures. I hope people utilize myRA’s to start saving because trust me no one wants to see Frank Costanza on the shuffle board court.

 [Photo courtesy of BlatantWorld]