Is this your new 401(k) plan?
In his State of the Union address earlier this week, President Barack Obama promised to create a new retirement savings vehicle for workers, noting that, "While the stock market has doubled over the past five years, that doesn't help folks who don't have 401(k)s." On Wednesday, the President signed a directive to create the so-called MyRA plans, and handed it over to Treasury Secretary Jack Lew.
If your business already offers a 401(k), you may not find much new in the MyRA, especially if you and your employees are not already contributing the maximum amounts to your 401(k). But if your company doesn't currently offer a retirement savings vehicle--and the White House says half of all employees do not have access to a retirement plan at work--MyRA might be worth a test drive. It's specifically designed to be easy for business owners to offer, in part, because it's meant to cost employers little to nothing.
Here's how it works: Any worker with a household income of $191,000 a year or less could have money automatically redirected from his or her paycheck and put into an account that pays a variable interest rate. Modeled off a program that's now available to federal workers, for the year ended December 2012, the fund had an average annual return of 1.74 percent. For the five years ended December 2012, the fund paid an average annual return of 2.69 percent. An employee can open account by contributing as little as $25; regular contributions can be as low as $5.
The money is contributed after-tax, just as it would be in a Roth IRA. Contributions are subject to the same limits as Roth accounts, too. In 2014, $5,500 a year is the limit for most people and $6,500 for those 50 and older. Once a MyRA account reaches $15,000, it gets rolled over into a conventional Roth.
Unlike a Roth, MyRA's are backed by the U.S. government, so the principal is protected. And, importantly, you can withdraw contributions (but not earnings) at any time without a penalty.
Also: This is probably not what the White House intended, but if you or your employees need to top off your personal emergency savings funds, the MyRA might be a good choice. The principal is protected from loss. Interest rates seem low, but one-year CDs are paying just about one percent a year, and unlike the MyRA accounts, you'll have to pay tax on whatever interest you do earn. Just a thought.