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Showing posts with label myRA. Show all posts
Showing posts with label myRA. Show all posts

What Some Financial Advisors Are Getting Wrong About myRAs

Last week President Obama delivered his State of the Union address to the nation and introduced us all to a new type of retirement account, the myRA. Since then, the ins and outs of the new accounts have been minced and parsed in just about every way imaginable.

Although opinions vary, a large portion of the financial community has come down hard on the new accounts. Now don’t get me wrong, I don’t think myRAs are the perfect retirement account, nor do I think they are going to resolve our looming retirement crisis, but for the right type of person, they can certainly be of use.

So why have so many in the financial community come down against myRAs? There are a number of reasons, many of which have merit, such as the lack of investment options available in the account (a government bond portfolio will be the only option). Others, however, have attacked the myRA rather unfairly.

For instance, I recently read an article in which an advisor was quoted saying,
“I would strongly advise against this option. For savers, I first recommend that they have an emergency fund equal to 6 months of expenses in a bank account. Once this goal is met, only then should they open a retirement account.”

This makes very little sense to me, but not because I'm against having an emergency fund. I'm all in favor of making sure you're prepared for the proverbial "rainy day." Rather, it makes no sense to me because a myRA is an excellent way to start or add to an emergency fund. To put it another way, the myRA can lead a double life. It can be a retirement account that masquerades as an emergency fund.

Common sense tells you that an emergency fund should be safe and available when you need it. The myRA accomplishes both. According to both the White House and the Treasury Department, the myRA will be 100% guaranteed, backed by the full faith and credit of the United States. That takes care of safe. Furthermore, since the myRA is actually a special type of Roth IRA, contributions can be withdrawn at any time, tax and penalty free. That sure fits my definition of available when you need it.

Let's not forget that the purpose of an emergency fund is for emergencies. Yet, hopefully those emergencies never materialize. With the myRA, you can plan for the worst and hope for the best, all at the same time. If an emergency does arise, you can use all or a portion of your myRA contributions to meet the unanticipated expense. On the other hand, if you’re lucky and your rainy day never comes, you've jumpstarted your retirement savings.

Another reason that large numbers of advisors have railed against the myRA is the fact that it can only accumulate up to $15,000. Here's what another advisor, in the same article I referenced earlier, had to say… “While every dime helps in retirement, it’s hard to see how this amount of money would affect someone over a possible 25-year retirement.”

Really? I, for one, would beg to differ. Why couldn't he have just stopped after "every dime helps?" Who could argue with that? Of course $15,000 can make a difference! Consider the following example to illustrate my point:

Bill is 20 years old and begins to work. He establishes a myRA and, through his employer, begins to have small amounts from each of his paychecks withheld and deposited into a myRA. Now let's further suppose that over the next 10 years, Bill continues to contribute to his myRA account until at last, when he reaches 30, his account balance reaches $15,000. This seems like a reasonable possibility, right?

At that point, under the current myRA rules, Bill would be forced to roll over his myRA account to a private Roth IRA. Now, in his private Roth IRA, Bill makes more traditional investments and earns 6% per year. By the time Bill reaches 65 and retires, that $15,000 will have grown to over $115,000. If Bill can do just a little better and earn 8% a year, that original $15,000 will have grown to over $220,000 by the time he retires!

Is it still hard to see how a retirement could be affected by myRA contributions? I didn't think so. Sure, $220,000 won't be enough to fund most retirements, especially 35 years from now, but it's a solid start.

Another reason advisors have come down against myRAs is that there are other retirement account options that are better. Quoting from the same article again, one advisor said “Don’t bother with MyRA. All employees that work for a company that offers a 401k plan with an employer match should start there,” while another said, “I would not advise anyone to use the MyRA account. If your employer has a 401k or ROTH 401k option, that should be the first vehicle to use, especially if there is some form of match.”

OK, I don't disagree with the idea that if you have an employer plan that offers a match, that’s generally going to be a better place to save. However, a myRA is not targeted to those with access to company plans!

Instead, it's aimed at young workers who are just starting to save and those with limited resources. Don’t believe me? Here’s what the Treasury Department myRA Fact Sheet has to say about who myRAs were created to help.

MyRA will be for savers who either do not have access to an employer-sponsored retirement savings plan or are looking to supplement a current plan. They will be designed for savers who want an investment with a low opening amount."

So yes, I completely agree; if you have a 401(k) or some other plan with a match, by all means start saving there. But then also know this... the myRA wasn't created for you! To dismiss the myRA’s potential for all savers - to go so far as to say “I would not advise anyone to use a myRA” because some people have a better option doesn't make any sense to me.

If that logic were to apply, why not get rid of Roth IRAs altogether because some people have access to Roth 401(k)s where the company will match contributions. No one would ever suggest that because that would just be crazy talk. A lot of people don’t have those company-match Roth 401(k)s, or Roth 401(k)s at all for that matter. For that portion of the population, the Roth IRA is a useful tool. Similarly, the myRA can be a useful tool for a certain segment of the population.

So here’s my final thought. Is the myRA perfect? No, far from it, but it does present an opportunity to help jumpstart at least some people’s retirement savings. It’s another choice. Another option to consider. No one is requiring anyone to participate. If you don’t think it’s right for you (or your client), don’t use one.

Accept the myRA for what it is. It’s an incubator account. A retirement account designed for the young or those with minimal income to save until they have saved enough or have the means to move on to something bigger and better.

- By Jeffrey Levine and Jared Trexler

More myRA Coverage: Analysis on CNBC and Nightly Business Report (PBS)

myRA CNBC analysis jeffrey levine
The Slott Report continues its myRA coverage today in lieu of the normal consumer mailbag, as this newly proposed retirement plan is of high importance to many Americans. Staff writer and Ed Slott and Company IRA Technical Consultant Jeffrey Levine was a part of a CNBC Street Signs panel yesterday afternoon as well as a guest expert on Sharon Epperson's Nightly Business Report on Public Television.

Below we share with our readers the two videos as a continuation of yesterday's myRA coverage, which included our detailed analysis of the retirement plan proposal with videos and popular tweets incorporated. If you missed it, you can click here to read the in-depth look at the myRA.

CNBC Street Signs Panel

Nightly Business Report (PBS)

-Compiled by Jared Trexler; videos include Jeffrey Levine

myRA: Analyzing the President's Retirement Plan Proposal

President Obama myRA analysisSo, did anything happen in President Barack Obama's State of the Union last night that we should be aware of? The President's new retirement plan proposal, called myRA, (rhymes with "IRA" when pronounced correctly - trust us, it's tough) drummed up a lot of discussion over water coolers and across the worldwide web last night and into this morning, including extremely active discussions on Twitter.

So what does the proposal mean for advisors, investors and the present and future of retirement planning? Our entire team of IRA Experts shares their initial thoughts on the proposal, including Jeffrey Levine's in an IRAtv video blog below (and at this link).

Ed Slott, America's IRA Expert: Bottom line - it's a good thing to start the ball rolling for those who take it seriously, but it won't be enough. People will still have to do more for themselves. 
We don't have all the details yet - but assuming it can be done, it sounds like a good step to help people get retirement accounts started. I find that once an account is opened, it is more likely to be contributed to, and more likely to grow. Because of the protection of principal, (US Bonds) the growth will be modest at best, but it's better than nothing and it's better than losing money for those who need it most. It appears this would be a Roth-like account so that the funds grow tax free and can be withdrawn without tax or penalty if needed (but that could also be a deterrent - if it is used for purposes other than a retirement account). It can also be transferred to a Roth IRA.
As long as there is not too much of an administrative burden on small employers, this would be a great first step to help get a retirement account started for people who might not make the effort on their own. The account could also be started with small amounts of money each week or month. But in the end, it only works if people are diligent about saving and don't raid the account for everyday purchases. The employee needs to know that this is a valuable tax-free retirement account, not a source of extra cash for a big TV. The idea is good though, and I think it will help the people who are serious about saving for their retirement. But then again, anyone really serious always had the option to open a Roth IRA on their own. Maybe this will help them kick-start the process. We'll have to see. Still, there won't be enough accumulated for a serious retirement account, so other retirement savings would still be necessary to supplement this. That's my two cents.
Joe Cicchinelli, IRA Technical Consultant: I think the President’s proposed “myRA” (my Retirement Account) and Social Security are related issues. While we’re not experts on Social Security, most experts believe that if there is no legislative change enacted, Social Security will become insolvent sometime in the future. In all likelihood, either taxes will have to increase and/or benefits will have to be cut for Social Security to remain solvent. I think the President’s proposed retirement account might indirectly affect the long-range Social Security solvency problem by trying to deal with the relatively low savings rate in this country. Maybe his underlying theory is that if more people will save for their own retirement, then maybe they won’t rely on Social Security as much in their retirement years.

Certainly, because the funds in a myRA would be invested in government bonds, which historically yield moderate investment returns, the money wouldn’t grow that much over time and may not keep up with inflation. However, having said that, I’m generally for almost anything that would increase savings for retirement. We’ll see what happens to the proposed myRA in the coming months.
Beverly DeVeny, IRA Technical Consultant:  We have seen the President’s desire to encourage Americans to save more for retirement in speeches from prior years (i.e. the autoIRA). In the past, his proposals always required some action on the part of Congress.
This time the President intends to create the myRA through a presidential executive order and bypass Congress altogether. What is a presidential executive order (EO), and can he do this?
EOs are issued under the President’s statutory or constitutional authority. They are issued to federal agencies, department heads or other federal employees and are treated the same as a law. They take effect 30 days after being published in the Federal Register. EOs cannot be used to authorize illegal activities. They bypass both Congress and the federal courts.

Can they be overturned? Presidents frequently amend or revoke an EO. Congress could pass a law to amend an EO, but the President could also veto that law. Thus, it is difficult for Congress to revoke or amend an EO. The Supreme Court has the authority to declare an EO to be unconstitutional and can revoke it.

Bottom line, it looks as though it would be possible for the President to get his myRA concept off the ground. We will have to wait and see how this all turns out.
Jeffrey Levine, IRA Technical Consultant:

The basics covered in IRAtv video on myRA:
  • Aimed at those without company plans like 401(k)s
  • Ineligible to contribute after $191,000 of income (married filing joint); $129,000 (single)
  • Voluntary with low minimum initial deposit ($25) and low additions ($5)
  • After $15,000 accumulated or same account 30 for years, funds must be rolled over
  • White House indicates a Roth-like structure of no deduction for contribution, but tax-free later on
  • Employer requirements unclear to this point
Why is it structured this way?
Most likely because it appears the President can do this, along with the Treasury, without Congressional action (as confirmed Wednesday afternoon by Treasury Secretary Jack Lew). President Obama had 6 retirement proposals in last year’s budget. None of them have materialized so far because most or all of them required Congressional action to implement. This appears not to require such action.

The myRA is not going to be enough on its own, but it can be a nice supplement to building a tax-free retirement account. It will also be a great way to encourage young or small savers because of the low minimums and the fact that the accounts are guaranteed. Starting early on is important because of the power of compounding and because of the mindset it puts you in.

The myRA might be able to be used as an emergency fund, similar to Roth IRA contributions. There would be no penalty or tax for early removal. However, people should only use these funds before retirement if absolutely necessary. If they go buy the latest video game system, a new car or some new clothes with the money, it’s not going to help. No special type of account can change that.

There’s always been two questions to answer: what type of account to save in and what to put in it? This account seems to blur that line.

The White House also released a fact sheet from The State of the Union address and had this to say about the proposed retirement plan.
Creating “myRA” - A New Starter Savings Account to Help Millions Save for Retirement. The President will take executive action to create a simple, safe and affordable “starter” retirement savings account available through employers to help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA account and, like savings bonds, would be backed by the U.S. government.
Articles of Interest:
Here are two articles of interest that give a good explanation of the initial proposal (you need to be a Wall Street Journal subscriber to read the second article):

Will Obama's 'myRA' plan take off? from MarketWatch 
Obama announces new retirement accounts

Now, we mentioned the electric Twitter discussions that took place right after the President's announced proposal last night. Below, we share a selection that includes some of the best analysis from financial advisors, thought leaders and financial media members.

Make sure to keep a close eye on www.theslottreport.com, as we will have more information on this proposal as it becomes available.