America’s newest retirement account provides convenience and safety because there’s only one investment option and no risk of losing money. More than 10,000 people have signed up for a myRA to begin building wealth for retirement, according to the U.S. Treasury. Here’s how you can set up and maximize the benefits of a myRA.
[See: 10 Retirement Planning Moves to Make in Your 20s.]
How to sign up. To open a myRA, you will need a Social Security number or individual taxpayer identification number and an official form of identification such as a driver’s license, U.S. passport or military ID. You will also be asked to select a beneficiary who will inherit your account if you pass away. You can open the account online at myRA.gov or by calling customer support at 855-406-6972.
Most U.S. employees with earned income are eligible to open a myRA unless their modified adjusted gross income exceeds $132,000 for individuals and $194,000 for married couples in 2016. “The myRA was really designed for people who don’t have a retirement account at work,” says Richard Ludlow, executive director of the myRA program at the Treasury. “If you have a 401(k), we definitely recommend you take advantage of that, especially if there is a match.” Each individual is only allowed to open one account and cannot open a second account after the original myRA is closed. Spouses can contribute to separate myRA accounts, even if one spouse doesn’t work. Minor children age 16 and older who have earned income may also begin saving in a myRA.
Three ways to fund your account. You can have your myRA deposits withheld from your paychecks through your employer. “The most effective way to save is payroll deduction, because if your money is going into a retirement plan, and it’s being done automatically before the money even goes into your bank account, you don’t spend the money,” says John Pelletier, director of the Center for Financial Literacy at Champlain College. Or you could set up one-time or recurring deposits from a checking or savings account. Taxpayers are also eligible to deposit some or all of their tax refund in a myRA.
There is no minimum balance requirement, and contributions as small as $1 are allowed. “The vast majority of our savers are putting in $50 to $100 per month,” Ludlow says. The maximum contribution amount is $5,500 in 2016, or $6,500 if you are age 50 or older. This limit applies to contributions to all of your IRAs, including traditional and Roth IRAs. You will trigger a 6 percent excise tax if you exceed these contribution limits.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
No investment decisions to make. MyRAs have only one investment option: a U.S. Treasury retirement savings bond. This investment is guaranteed by the government never to decline in value, so there’s no risk of losing the money you save in this account. “If you are very risk-averse, and many people are, this is a guaranteed rate,” says Ted Beck, president and CEO of the National Endowment for Financial Education. “You don’t have to worry about having your balance go below what you started at or fees chewing away at your principal.”
While you are protected from losses, money in a myRA isn’t likely to produce impressive returns. This investment earned 2.04 percent in 2015 and averaged annual returns of 2.94 percent during the 10-year period that ended in December 2015. The interest rate is variable and is not guaranteed. “It’s a very low rate,” Pelletier says. “It’s probably better than what you could get in a five-year CD, but it probably isn’t as good as a target-date maturity fund.”
Tax implications. The myRA is an after-tax account, so you don’t get a tax break in the year you contribute. However, you don’t have to pay tax on the investment gains while your money is in the account. And if you take withdrawals after age 59 1/2 from an account that is at least five years old, you won’t ever have to pay tax on the investment earnings. You can roll over your myRA balance to a Roth IRA at any time without triggering taxes or penalties.
If your adjusted gross income is below $30,750 for individuals and $61,500 for married couples and you save in a myRA, you may be eligible to claim the saver’s credit on your tax return. The saver’s credit is worth between 10 and 50 percent of your myRA deposit, up to $2,000 for individuals and $4,000 for couples.
Taking money out early. If you need the money before age 59 1/2, you can withdraw the money you contributed to the myRA without incurring taxes on it. “You can take your principal out, but any interest you earn has to stay in the account, otherwise there is a penalty,” Beck says. Earnings that are withdrawn early could be subject to income tax and a 10 percent early withdrawal penalty. However, you might be able to avoid the early withdrawal penalty if you use the money for a couple of specific purposes, including a first home purchase, higher education costs, large medical bills or to purchase health insurance after a layoff.
[See: 10 Ways to Avoid the IRA Early Withdrawal Penalty.]
Hitting the maximum balance. You can continue to save in a myRA until your account balance hits $15,000 or the account turns 30 years old, whichever happens sooner. At that time, you will be required to transfer your account balance to a private sector Roth IRA. “We notify you that you have hit the limits and can’t contribute more, so we ask you to move over to another account,” Ludlow says. “We aim to be an option for those who are just starting saving for the first time, and after they build up some savings, they will graduate from the myRA.”
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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A Guide to Opening a MyRA originally appeared on usnews.com
