Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.
President Obama recently announced a new type of retirement savings account, the "myRA". There was considerable press about the myRA, but the details are still hazy. Here are the basics.
The account is designed to be a "starter" retirement account and would function like a Roth IRA. That is, contributions wouldn't be deductible; distributions would not be taxable. As a starter account it's intended that it can be opened with a contribution as small as $25 and subsequent contributions could be as small as $5. Contributions would be voluntary and automatic through payroll deductions. Savers will have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time.
The product will be offered via a familiar Roth IRA account, and savers will benefit from principal protection, so the account balance will never go down in value. The funds would be put in U.S. government bonds and savers will earn interest at the same variable interest rate as the federal employees' Thrift Savings Plan (TSP) Government Securities Investment fund. The security in the account, like all savings bonds, will be backed by the U.S. government.
The myRA would be available to taxpayers with AGI up to $191,000 ($129,000 for individuals). These accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014. The accounts are little to no cost and easy for employers to use, since employers will neither administer the accounts nor contribute to them. Participants could save up to $15,000, or for a maximum of 30 years, whichever occurs first, in their accounts before transferring their balance to a private sector Roth IRA.
Workers would not be required to contribute and will be free to opt out. Employers would not contribute. The plan would also help defray the minimal administrative costs of establishing auto-IRAs for small businesses, including through tax incentives.
There are a number of questions yet unanswered. One of the most important involves distributions. Distributions after age 59-1/2 will be nontaxable. But language in releases suggest that earlier distributions would also be tax free. Earlier distributions might be nontaxable if used for certain purposes, presumably hardship.
It's believed that Congressional approval is not required. That could allow for early implementation.
The myRA is hardly a revelation on the pension stage. The Roth IRA has more flexibility and allows for higher contributions. A traditional IRA has the benefit of being deductible for many taxpayers. SIMPLE plans allow employer matching. The 401(k) allows for larger payroll deduction and employer matching. The advantage to the myRA is that younger workers and those who can't afford to fund an IRA with the usual starting minimum of $1,000 will be able to begin saving tax free. There is little question that automatic deductions encourage regular savings. And the plan is designed to minimize or eliminate any cost to an employer. But the myRA offers no advantages for taxpayers who can contribute to a Roth or traditional IRA, SIMPLE, 401(k), etc.
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--Last Update 02/13/14