President Obama unveiled new details on his new retirement savings account idea, the MyRA, during this week's State of the Union address. More than anything else he mentioned, it caught my eye as we do have a serious problem in this country - according to a recent report, almost half of employed American workers are employed by companies that don't offer retirement plans. In theory, it's a great idea, and one I support- but that doesn't mean it is without flaw - one that could be potentially fatal to the entire idea.
There is a great breakdown of the key components of the MyRA provided by the Wall St. Journal that can be read here. Some key points worth mentioning:
- Investments are guaranteed to not lose money, consisting of government savings bonds backed by the U.S. Government.
- Accounts will function as Roth IRAs instead of Traditional IRAs or 401(k) plans. Meaning they'll be funded with after-tax dollars, and if left alone long enough - available to use 100% tax-free.
- Initial investments can begin as low as $25 with subsequent contributions as low as $5. The idea is to start saving, no matter how modest the amount.
- Once account values reach $15,000 they will have to be rolled into a private-sector Roth IRA.
The movement to get folks saving is an excellent start. No saving is bad saving. The major issue is that all investments may be withdrawn at any time - tax and penalty free. These funds are for RETIREMENT, not the here and now. Making them available when the furnace breaks or it's time to buy a new car will leave MyRA's accounts wide open to be tapped for early use - and that will happen, leaving MyRA savers back at the proverbial drawing board. Unlike 401(k) loans which must be repaid, that's not the case here. Until that piece of the MyRA puzzle is changed - the idea is strong in theory - but with potential flaws that could be quite costly.
Chuck Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).