This week during the State of the Union address President Obama announced his new retirement program (MyRA).  MyRA was implemented under executive order so unlike the proposed automatic IRA, Obama’s new plan doesn’t require legislation or congress approval.  MyRA is clearly a plan to start shifting retirement dollars into a government controlled fund similar to Social Security.  It is unclear how far these new retirement plans and proposals will go, but it is clear they are making headway – and anyone who wishes to keep the freedoms under current IRA law would be wise to protect it sooner rather than later.

MyRA stands for My Retirement Account but anyone who compares IRA rules with MyRA rules will end up calling the new plan “his retirement account”.  I say this because what MyRA essentially does is take money from under your mattress and give it to the government, in return you will receive little tax incentives (if any) and low returns that may not keep up with inflation.  Here is what we know so far about MyRA:

No Tax Deduction

The new plan will be offered under the familiar Roth IRA so contributions are made with after tax dollars and will grow tax free.  Just like the Roth IRA, distribution of  interest payments must be taken after the age of 59 1/2 if you want to avoid a penalty.  On the bright side, you can take your contribution back at any time and consider it a low interest loan to the Treasury rather than a retirement plan.

Traditionally, contributions to an IRA would be tax-deductible, so the retirement saver receives a tax break today and will trickle taxable distributions after retirement age.  Contributions to Roth IRAs are not deductible but they grow tax-free, so in a self-directed scenario one could receive a tremendous advantage from tax-free growth.  The MyRA plan takes away both Traditional and Roth IRA benefits.

Little to No Return

Unlike self-directed IRA plans, Obama’s new retirement plan will offer only one investment option – a low-interest Treasury Bond.  The White House claims “savers will earn interest at the same variable rate as the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund” (G-Fund).  According to the G Fund returned an annual average (as of Dec. 2012) of 1.47% over one year, 2.24% over 3 years, 2.69% over 5 years and 3.61% over 10 years.

The problem with such low yields in the MyRA plan is it defeats the purpose of a Roth IRA altogether – which is to MAKE money tax-free.  If the idea is for savers to stay in-line with inflation they would be wiser to just keep their money “buried in the yard”.  Just because the Administration plans to “aggressively encourage” employers and employees to take part in this new retirement plan doesn’t mean it’s a wise move for the end consumer.  To the contrary, when you look at MyRA vs the current Roth IRA, it insults the intelligence of future retirees who would be “encouraged” to participate.

The Risk

Simply put, the mission of the G Fund is to produce a rate of return higher than inflation without exposing risk.  Obama claims that the new retirement plan is backed by the government and will not lose its principal.  Although this sounds relatively safe, there is inflation risk, or the possibility that your investment will not grow enough to offset the reduction in purchasing power that results from inflation.  In other words, the price of milk, gas, corn, rent… may go up, but your MyRA will remain the same… The value of the dollar may go down, but your MyRA will have the same amount of dollars in it.

While self-directed investors capitalize on cost of living or market fluctuations, MyRA savers will be unable to do so with their retirement dollars.  Self-directed IRA investors who save enough over time and invest wisely have the ability to live off their retirement dollars without cutting into its principal, where the MyRA plan may end up providing a nominal/fixed income similar to a social security check.

What Do You Think about Obama’s New Plan?

From what we can tell Obama’s retirement account doesn’t seem to offer many incentives, so it’s hard to say how savers are
“encouraged” to sign up.  Will this start out with Union workers at first and later down the road attempt to switch existing Roth IRAs?  Aside from “helping” Americans save for retirement, what is the real motive behind these new retirement plans?  Is it simply to fund the U.S. Treasury?