The New MyRA Account: Is it a Good Idea?
In his State of the Union speech Monday night, President Obama announced a plan to create a new type of retirement savings account: the MyRA.
The details are still emerging, but here’s information from the White House:
- annual savings limit: $5,500 ($6,500 age 50+)
- income limit: $191,000 (married) or $129,000 (single)
- after-tax money goes into the account, gains are tax-free (like a Roth account)
- account limit: $15,000. After that, you must roll the account into a Roth account (and start over?)
- investment option: the federal government’s Thrift Savings Plan (TSP) G fund, which is based on US government bonds
- risk: no risk of loss, but the rate of return has been low: 1.89% for 2013.
Is it a good idea?
In my opinion, no.
Good Goal, Bad Way to Achieve Goal
The goal is very good: encourage more Americans to save for retirement. That is a terrific goal. But as a way to achieve the goal it’s not what our country needs.
As I talk with clients, the two most common obstacles to saving for retirement are:
- Complexity: too many choices and rules about those choices cause uncertainty and confusion.
- Decide Tomorrow: it’s a decision that can be postponed one more day without harmful consequences, but after thousands of days of delay the consequences are very harmful.
Complexity makes it hard to make quick decisions, which leads to delay. Delay leads to a bad outcome in retirement. For many clients, the main value I bring is addressing those two obstacles.
One more type of retirement savings account adds to the problem of complexity, without any significant benefits over accounts available now.
Here are all the types of retirement savings accounts now: 401(k), 403(b), 401(a), 457(b), 457(f), Roth 401(k), Roth 403(b), Roth 457(b), Traditional IRA, Rollover IRA, Roth IRA, SEP IRA, SIMPLE. The IRS publishes a 64-cell chart about whether you can move money between different types of accounts.
Do we need another type of account to solve the retirement savings problem?
We obviously need a much simpler system, which makes the benefits of saving very clear and provides incentives. The current employer-based system, started in the late 1970s, has been amended over the years without a comprehensive strategy. And workers now move from job to job more frequently, proliferating old employer-based accounts.
What We Need: Truly Simple Retirement Account
1. We need to eliminate the alphabet soup of account types and different rules, and create a single type of retirement account that is portable as a worker moves from job to job and has a single set of clear rules. The account would be a mix of worker and employer contributions. The account must have a cap on fees charged by financial institutions.
2. We need reform in the financial services industry so that all advisors operate under the “fiduciary standard” — legally acting in their clients’ best interest. This would remove the worry that an advisor is somehow taking advantage of the client for his own benefit. This is the standard today for only one segment of advisors: Registered Investment Advisors (RIA). Other types of advisors do not have to act in clients’ best interest. (Waypoint Financial Planning is an RIA.)
This type of structure would make it simpler for workers to save, and be more confident about getting help.
What we really need is a Congress that can unite around a common goal that helps the American people, without the influence of the money from the Wall Street lobby.