Many small businesses offer 401(k)s or other qualified retirement plans so that owners and employees can save for retirement on a tax-advantaged basis. However, start-ups and struggling companies may be unable to offer this benefit. There’s now a way for these companies to help low- and middle-income employees begin to save for retirement; it’s called a myRA (pronounced MY-RA).
In the 2014 State of the Union address President Obama proposed a retirement savings account akin to Roth IRAs. The Treasury launched a pilot program to implement the proposal. The pilot program has been completed and myRAs now go nationwide.
Rules for myRAs
Think of myRAs as mini-Roth IRAs, with annual contributions capped at the same amount as traditional and Roth IRAs (e.g., $5,500 for 2015 and 2016, or $6,500 for those who are age 50 or older by year end). Contributions can be in any amount chosen by the employee (e.g., $2, $20, or $200). There are no fees for myRA accounts. Contributors do not have to make any investment decisions; their contributions earn interest which is the same as the rate for investments in the Government Securities Fund (the average annual return was 3.19% over a 10-year period ending December 2014).
There are three ways for employees to make contributions:
- Payroll withholding
- Direct transfers from personal bank accounts to the Treasury
- Application of federal tax refunds
A number of Roth IRA rules apply to myRAs:
- Contributions are not tax deductible. Earned are tax deferred and can become tax free.
- Contributions can be withdrawn penalty free at any time. Because they are made with after-tax dollars, the withdrawals are tax free. However, withdrawals of earnings prior to age 59 ½are usually taxable and subject to penalty (there are exceptions).
- Income limits govern eligibility to make contributions
It’s not yet clear whether contributors can claim the retirement savers credit, which effectively helps a lower-income employee use this savings plan. The draft to the 2015 version of Form 8880, which is used for the credit, does not include myRAs, but the final version could be changed.
What employers can do
Companies do not have to adopt any plan or sign any documents to initiate the myRA option. There are only two actions for employers to take:
- Inform employees about the availability of myRAs. You can provide information or direct them to government resources. The Treasury has tools to help you.
- Enable payroll withholding for employees who want to contribute to myRAs. You then remit the withholding to the Treasury.
Employers can find more information about myRAs from myRA.gov.
myRAs are not intended to supplant qualified retirement plans. According to government sources, they are merely meant to help people get used to saving for retirement when they don’t have access to company savings plans.
Whether myRAs will catch on for employers that can’t afford to offer qualified retirement plans remains to be seen. From the employee perspective, a myRA can’t hurt, but as a meaningful retirement savings tool, it’s not much.