Retirement Savers, Why the New myRA Plan Isn’t Best for You

The Treasury Department just announced that everyone will be able to invest in myRAs. How does this kind of account compare with a Roth IRA? Should I consider investing in one?

The federal government’s myRA program is a version of the Roth IRA designed to help people who don’t have access to a 401(k) start saving for retirement. The Treasury Department introduced the myRA through a pilot program in 2014 and recently made the plan available to everyone who qualifies to make Roth IRA contributions. The program can be an easy way for people to start saving for retirement with just a little money, but most people have better options for the long term.

You can contribute up to $5,500 (or $6,500 if 50 or older) to a Roth IRA for 2015, including a myRA, if your adjusted gross income is less than $116,000 if you’re single or $183,000 if you’re married filing jointly. The contribution amount phases out entirely if you earn more than $131,000 if single or $193,000 if married filing jointly. The contribution limits are the same for 2016, but the income limits are slightly higher (see Retirement Plan Contribution Limits for 2016 for more information). As with any Roth IRA, you don’t receive a tax break for contributions now, but you can withdraw the contributions tax- and penalty-free at any age and can withdraw the earnings tax-free after age 59 1/2 if you’ve had the account for at least five years.

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But with the myRA, there are no minimum investing requirements, no fees and no investing risk. You can sign up at www.myRA.gov and can contribute money from a checking or savings account or sign up to have money transferred automatically from your paychecks – even just $25 or $50 from each paycheck. (You can’t contribute to any IRA unless you or your spouse has earned income from a job for the year.)

The plan has only one investing option: a special U.S. savings bond that earns interest at the same variable rate as the investments in the Government Securities Investment Fund (G Fund) in the Thrift Savings Plan. The investment is guaranteed not to lose money, and the G Fund’s returns have been a lot better than they have been for money market funds; the G Fund earned 2.31% in 2014, with an average annual return of 3.19% over the 10-year period ending in December 2014. (See the TSP G Fund fact sheet for more information about the G Fund.)

You’ll even be able to have all or part of your tax refund deposited directly to your myRA account if you enroll in myRA first. Check the “savings” box and provide your myRA account and routing number in the refund section of your tax return, says Richard Ludlow, executive director of the myRA program.

But the myRA is not designed to be a long-term investment. You must roll over the balance to a private-sector Roth IRA administered by a brokerage firm, mutual fund company or bank when the balance reaches $15,000 or after 30 years, whichever comes first. (You are free to roll it over at any time.) The fixed returns may not keep up with inflation, and if you have several years before retirement, you can afford to take risks in the stock market with the potential for greater returns over the long run. (See 5 Tips for Beginning Investors for more information.)

If your employer offers a retirement savings plan-- a 401(k), 403(b) or 457 plan, or the Thrift Savings Plan -- that should be your first choice for your savings, especially if your employer matches your contributions. You’ll be able to start saving a small amount from each paycheck and have more investing options than you do with a myRA.

If you have more money to invest, open a Roth IRA. Many brokerage firms and fund companies require a few thousand dollars to open a Roth IRA. But several IRA administrators have low investment minimums, charge no annual fees and let you invest in hundreds of fee-free mutual funds and commission-free exchange-traded funds. TD Ameritrade, for example, has no minimum investing requirement and no administrative fees for its IRAs, and you can search for no-transaction-fee funds with investment minimums of less than $250 or $500 by using its Mutual Fund Screener tool. Or you can invest in an exchange-traded fund and start by purchasing as little as one share. TD Ameritrade and several other brokerage firms offer more than 100 commission-free ETFs. See the Kiplinger ETF 20 for our favorite ETFs, then check with the IRA administrator to see which ones are available on its commission-free list.