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What You Should Know About the New myRA Retirement Accounts

In the 2014 State of the Union address delivered on January 28, President Obama announced that a new type of retirement account would soon be made available to U.S. workers. Dubbed “myRA,” this account is designed to help the nearly half of all U.S. workers who don’t have access to an employer-sponsored retirement plan start saving for retirement.

Mr. Obama signed a presidential memo the day after the speech, directing the Department of Treasury to create this new retirement account. Initially, myRAs will be offered through a pilot program to businesses and their employees who sign on before the end of this year.

A Retirement Jump Start

According to Daniel Lerner, Executive Vice President, Investor Services for David Lerner Associates, the myRA was designed primarily to help low- and middle-income workers get a jump start on their retirement savings. “Millions of these employees work for businesses that don’t offer a retirement plan, which has made it hard for many of them to get started on retirement saving. With the myRA, it will be easier for many of these employees to establish a retirement savings plan at work and to start building a retirement nest egg, possibly for the first time in their lives.”

The myRA will work much like a Roth IRA, which permits after-tax contributions by employees who can then withdraw the money tax-free after they retire. Workers can take their myRA accounts with them when they switch jobs, and they can contribute to a single myRA account from multiple part-time jobs.

Like a Roth IRA, participants can withdraw contributions (but not earnings) from their myRA account at any time and for any reason without penalty. The annual contribution limits for myRAs are also the same as for Roth IRAs — up to $5,500, or $6,500 for individuals who are at least 50 years old, in 2014.

There is one big difference between myRAs and Roth IRA — Money contributed to a myRA can only be invested in government savings bonds. These bonds are backed by the full faith and credit of the U.S. government, so there is no risk of principal loss.

The Risk-Return Tradeoff

The tradeoff for this safety, notes Lerner, is limited return potential. “There is a risk-return tradeoff with practically any investment. If you don’t want to risk the loss of your principal, then you are limiting how much money your account can earn. This might be appropriate for risk-averse individuals, but investors who want to possibly earn higher returns on their retirement savings might want to consider opening a Roth IRA instead.”

According to the White House, myRA accounts will earn the same rate of return as the Thrift Savings Plan’s Government Securities Investment Fund that federal employees have access to. This fund’s average return between 2003 and 2012 was 3.6 percent — in 2012, the return was 1.5 percent.

Another difference between the myRA and a Roth IRA is the low contributions that workers can make to their myRAs. A myRA account can be opened with as little as $25, and contributions as small as $5 at a time can be made via payroll deductions. “This will enable low-income individuals to at least save something for retirement, even if they start out small,” says Lerner.

Employees can choose to convert their myRA to a Roth IRA at any time if they decide they want to assume more risk to possibly generate higher returns. If their account balance reaches $15,000, or if the account is open for 30 years, they will be required to rollover the balance into a Roth IRA.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC

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