By: Gregory Korte and John Waggoner
January 29, 2013
A new savings plan will allow Americans to buy savings bonds in a starter retirement account that "guarantees a decent return with no risk of losing what you put in," President Obama said Tuesday evening in his State of the Union address.
"Today, most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s," he said.
Obama said he would direct the Treasury Department to create new "MyRA" accounts to allow people to more simply invest in Treasury bonds. "It's a new savings bond that encourages folks to build a nest egg," he said.
Safe: The new savings bonds would have its principal guaranteed by the U.S. government, much like a traditional savings bond.
Tax benefits: The MyRA bond would be like a Roth IRA: Your contributions would not be tax-deductible, but your earnings would be free from tax when you withdraw it. As with a Roth, your contributions can be taken out tax-free at any time.
Affordable: Minimum initial investment could be as low as $25, and subsequent investments could be as little as $5, through payroll deduction. Savers can keep the same account when they change jobs.
Rates: Savers will earn interest at the same variable interest rate as the federal employees' Thrift Savings Plan (TSP) Government Securities Investment Fund. The fund earned 1.74% last year.
Availability: The MyRA would be open to households earning up to $191,000 a year through their employers. Employers won't incur any cost to offer the MyRAs. You'll be able to save up to $15,000 a year for up to 30 years before transferring to a private Roth IRA.
The proposal was not the most controversial proposal the president unveiled, but it was a brand new idea he hadn't previously announced. The White House said it would release more details Wednesday, as the president embarks on a tour to expand on themes of the speech.
Retirement accounts aimed at small investors are often high-cost, in the case of brokerages, mutual funds and insurance companies. Bank retirement accounts often get sold up to high-cost investments when they grow large enough. But someone who uses a MyRA to save $15,000 could switch to a low-cost, broadly diversified fund, such as Vanguard Total Stock Index. Cost for one year: $7.50.
Employers who offer the option won't have to administer them. And if they automatically enroll employees -- which they won't be required to do -- those employees will have a greater chance of accumulating retirement savings. At Fidelity Investments, pans with auto enrollment have an 84% participation rate vs. a 53% participation rate for plans without auto enrollment.
"It remains to be seen whether the MyRA is a better mousetrap," says Gary Schatsky, a New York financial planner. "For many, it could be first time they are participating in retirement savings in any meaningful way."