Understanding the End of myRA: Impacts and Alternatives

In 2015, the U.S. government introduced myRA as a retirement savings option for individuals without employer-sponsored plans. However, by 2018, this initiative was discontinued due to financial inefficiencies and limited uptake, leaving many to seek alternatives.

Key Features of myRA Accounts

The myRA (My Retirement Account) was created as a starter retirement savings vehicle for individuals without access to employer-sponsored plans. It was structured as a Roth IRA, meaning contributions were made with after-tax dollars, allowing for tax-free withdrawals in retirement under IRC Section 408A.

A key benefit of myRA accounts was the absence of fees, making them accessible to low-income earners or those new to retirement savings. The accounts were backed by the U.S. Treasury, providing a secure investment with no risk of losing principal. Funds were invested in a U.S. Treasury savings bond, offering modest returns tied to the Government Securities Investment Fund (G Fund) of the Thrift Savings Plan.

Contribution limits aligned with Roth IRA rules, capped at $5,500 annually, or $6,500 for individuals aged 50 and older. Accounts had a maximum balance limit of $15,000, at which point funds needed to be rolled over into a private sector Roth IRA, encouraging users to transition to more comprehensive retirement savings options.

Reasons for Discontinuation

The myRA program ended in 2018 due to financial inefficiencies and low adoption rates. Despite its goal of providing a simple savings option, it attracted only about 30,000 accounts, far below expectations. The U.S. Department of the Treasury reported program costs exceeding $70 million, raising concerns about its sustainability.

The program’s fee-free model posed challenges for cost recovery. Unlike private financial institutions that rely on fees or returns to offset expenses, myRA depended on government funding, creating a financial burden. Additionally, regulatory compliance added administrative complexity and costs, further highlighting inefficiencies in the program’s structure.

Impact on Existing Account Holders

With the program’s termination, account holders were required to transfer their funds to alternative savings vehicles. They were encouraged to roll over balances into private sector Roth IRAs, which offered similar tax advantages. To avoid tax implications or penalties, rollovers needed to be completed within 60 days, as specified under IRC Section 408A.

Transitioning involved evaluating private Roth IRA options, which varied in fees, investment choices, and services. Unlike the straightforward myRA setup, private IRAs required a more hands-on approach to account management, prompting account holders to assess their retirement goals and risk tolerance carefully.

Alternatives for Retirement Savings

Former myRA account holders have several options for retirement savings. One is the traditional IRA, which allows for tax-deductible contributions and tax-deferred growth. This option is advantageous for individuals who expect to be in a lower tax bracket during retirement, as withdrawals are taxed as ordinary income under IRC Section 72.

Employer-sponsored plans like 401(k)s are another option, often featuring employer matching contributions that effectively boost savings. These plans also provide higher annual contribution limits than IRAs, currently $22,500 for individuals under 50, with an additional $7,500 catch-up contribution for those 50 and older, per the latest IRS guidelines.

Transition Process for Account Holders

The transition process for myRA account holders required careful planning to ensure a smooth transfer of funds. The U.S. Department of the Treasury provided guidance on selecting a private sector Roth IRA to maintain tax advantages.

Rolling Over to a Roth IRA

The rollover process involved transferring funds directly from myRA to a chosen Roth IRA provider. Account holders were advised to use a trustee-to-trustee transfer to avoid tax consequences. Consulting a financial advisor was recommended to help select a Roth IRA that aligned with individual financial goals and risk preferences.

Navigating the Private Sector

After completing the rollover, account holders faced the task of managing a wider array of investment choices in private Roth IRAs. Unlike the singular investment option of the myRA, private IRAs offered diverse assets, such as mutual funds, stocks, and bonds. This variety allowed for tailored investment strategies but required a more proactive approach to account management. Financial literacy resources and workshops could help individuals better understand these options and effectively plan for retirement.