You probably know that the IRS requires you to start taking mandatory distributions from your IRA when you turn 70 1/2, even if you don’t actually need the money. But can you do a Roth conversion at that late date, and thereby defer distributions forever?
In case you missed it, the contribution limits to your 401(k) plan, IRA and Roth IRA—set by the government each year based on the inflation rate—will not go up in 2017. Just like this year, you will be able to defer up to $18,000 of your paycheck to your 401(k), and individuals over age 50 will still be able to make a “catch-up” contribution of an additional $6,000. (The same limits apply to 403(b) plans and the federal government’s new Thrift Savings Plan.) Your IRA and Roth IRA contributions will continue to max out at $5,500, plus a $1,000 “catch-up” contribution for persons 50 or older.
Suppose somebody offered you a choice between two cars. The first car was identical to the second car, with one exception: it would only travel at a constant speed of 30 miles an hour. In the other car, you could could choose to travel at any legal speed, and quite a number of illegal ones. Meanwhile you can only buy the one-speed car if you make less than a certain threshold income, and eventually, if you drive enough miles in the one-speed car, you’d have to buy the car that can travel at any reasonable speed anyway.
Which car would you choose?
That’s the interesting choice posed by a new retirement account that was launched on Wednesday. In his 2014 State of the Union address, President Obama announced that he was directing the U.S. Treasury Department to create a new retirement savings initiative: the myRA, officially named My Retirement Account. This week, the first retirement savers will put the first dollars into the program.
The myRA is basically a government-sponsored Roth IRA with the same contribution limits ($5,500 a year, or $6,500 for those 50-and-older). Like the Roth IRA, all myRA contributions will be made after-tax (in other words, no deductions for the contributions), but the money will come out tax-free when the taxpayer reaches age 59 1/2. However, unlike the Roth, where the money can be invested in zillions of possible combinations of thousands of mutual funds, ETFs and individual stocks, the myRA participant has exactly one investment option: the government’s Securities Fund for federal employers, which earned 2.31% last year.
Moreover, there are limitations on who can participate in the myRA. Only people with no 401(k) or 403(b) retirement plans at work can make myRA contributions, and even then, only those with an adjusted gross income less than $131,000 a year ($193,000 for couples). Also: once you’ve accumulated the maximum myRA balance of $15,000, you have to move the money over to a private-sector Roth IRA. The only benefit: the myRA doesn’t come with any custodial or account fees, but those are typically nominal when you open a private sector Roth IRA.
So why would people contribute to a retirement option that is identical to a Roth IRA, but with roughly a zillion fewer investment options? It’s possible that unsophisticated investors will appreciate the simplicity of the myRA solution, where, instead of having to decide where to invest, they simply lend their money to the federal government and collect the (modest) interest. The fact that the myRA account has no minimums could be attractive. Most private sector Roths require at least $1,000 to be invested, but theoretically you could start your myRA with a penny.
It’s also possible that the U.S. Treasury Department is about to discover that there’s less demand for an inferior retirement plan than government economists had projected.
About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.
Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association.
For beginning savers, a MyRA is a safe way to get started.
MyRA, the Obama administration’s free, guaranteed-return starter retirement account, launched nationwide on Wednesday. The government-backed plan is an option for the tens of millions of U.S. workers whose employers don’t offer a retirement savings plan. MyRA accounts are open to anyone earning an annual salary of less than $131,000, or $193,000 if they are married and file taxes jointly.
The Treasury Department officially rolled out its new myRA retirement plan on Wednesday, deeming it a free, no-risk savings plan. The truth is that the newly launched retirement account will do very little to help the working poor and will quickly become another bloated bureaucratic system that wastes billions of taxpayer dollars.