The Following is a guest post from Richard Dedor. Richard is a national motivational speaker, personal coach and author, writing is just one way Richard devotes his time to changing the world. Richard’s work has appeared in Sports ‘n Spokes magazine, RSI Magazine, The Liberty Press, and multiple online publications dedicated to personal development and motivation. He has also been a contributor to The Agency Post and Primer Mag. His experiences in the non-profit sector and in politics as a candidate for mayor of Mason City, Iowa, have given him a wealth of experience that provides constant inspiration. Richard holds a degree in public relations from the University of Northern Iowa and was a 2002 recipient of the Iowa Bar Association’s American Citizenship Medal. Richard has written two books; In Pain and Running from Yourself, Transforming Fear into Courage. He can be reached on Twitter @RichardDedor
Anytime a new investment vehicle is born, investors like myself perk up. During President Obama’s State of the Union on January 28, he caught a lot of us by surprise with his introduction of a new investment vehicle named: myRA which stands for “My Retirement Account.”
Before I give you my opinion, I want to spell out the facts about this new account and the account it is designed after: the Roth IRA.
The president has directed the Treasury Department to create a new investment vehicle, aptly named myRA in what, WhiteHouse.gov describes as, “a safe, simple, and affordable “starter” retirement savings account which will ultimately help millions of Americans prepare for retirement.”
With myRA, a starter account, contributions can be as low as $5 and if employers set it up, it can be deducted directly out of paychecks. Additionally, because the account is connected with the government and not a brokerage house, your myRA account goes with you whenever you change jobs. Another benefit of this new account, is that you can withdraw tax-free contributions at any time, and there are no fees associated with the myRA.
The drawbacks however, are that the only thing myRA can get invested in is a Treasury security, which is backed by the “full faith and credit” of the United States. While that backing is a good thing, and something other investments don’t have, the ultimate goal of these securities’ is to produce a rate of return higher than inflation while avoiding exposure to the overall market.
In their documents and promotion of the myRA, the White House has said these investments will produce a rate slightly higher than inflation and has had an average annual return of 3.6% between 2003-2012.
How Does This differ from the Roth?
Conversely, the Roth IRA investment vehicle has been around since 1997 and has served as an instrument of choice for many young investors for it’s simplicity and tax-advantages. Just like the new myRA, the Roth offers a great tax break: Tax-free income during retirement. Of course, this only matters when you retire, as your rate could be higher or lower, depending on a lot of factors.
Also like the new myRA, any penny you put into a Roth affords you the ability to get back out, tax-free and without penalty. This comes in handy if you have a major life event (hospitalization) or other expenses that you need to take care of on short notice. Investment in a Roth should happen after you take advantage of a matched emplyoer 401(k) or 403(b) plans. That’s where the birth of the myRA came from because many employers don’t offer a 401(k) or similar plan.
One of the drawbacks of a Roth IRA is that you have to go through a third-party to set up an account and purchase investments. These investments can include bonds, money market funds, and mutual funds to help you build for your retirement.
Another drawback of setting up a Roth over the myRA is the fees. Although small, they can appear to be a lot. Typically, it is a 5% purchase fee (if you invest $100, $5 goes to fees right off the top). Then there are typically small management fees charged on a yearly basis (usually 0.1 – 0.5%). Again, not a lot, but it’s something.
Those fees go towards the management of the funds you purchase. If you are young, you are likely to have a riskier portfolio of holdings which requires human capital to manage those funds to make sure you get the best possible investment mix. That’s a major plus over the myRA investment where you are likely to see just a 3-4% growth.
With myRA, you get one option: the government security. With a Roth IRA, you have a large array of options, which can return amounts worse than the government security but also a growth of 30-40% in good years. All of this is to say that both vehicles have their plusses and minuses. In the end, if you plan on building a nest egg, a myRA can only grow to be valued at $15,000 before you will be required to roll it over into something new, like a Roth.
For nearly 20 years, the Roth has been the vehicle of choice for investors young and old and it will still remain true. Even if you don’t have the $500 minimum investment many Roth funds require, start with the myRA and plan to roll over to a Roth once you have a large enough balance. Even though they can be riskier (you have full choice control which you don’t have with myRA), the returns are much greater and will help you exponentially more in retirement than the myRA can even dream.
To learn more about having the strongest retirement possible see these other great articles.