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Should you embrace the MyRA?

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So far, the MyRA—the much ballyhooed retirement savings vehicle pitched by the Obama administration last year—has received at best a lukewarm response from the public.

Strategy: Don’t dismiss the MyRA immediately. It could be a good deal if you’re just starting out. But you might prefer an alternative that allows you to salt away more in your account.

The Treasury Department recently published a final rule paving the way for MyRAs to debut in 2015. (31 CFR Part 347, RIN 1530–AA08, 12/15/14)

Here’s the whole story: As with Roth IRAs, a MyRA participant can contribute after-tax funds up to an annual threshold. The contribution limit for 2015 is $5,500; $6,500 if you’re age 50 or older (the same as for Roth IRAs). The initial MyRA deposit can be as little as $25 with subsequent payroll deductions of $5 or more per pay period. MyRAs may be offered through employers or private financial institutions.

The contributions grow without any current tax erosion. As with a Roth IRA in existence at least five years, qualified distributions are tax free. Conversely, payouts of earnings before age 59½ are subject to tax, plus a 10% penalty tax may apply. Like a Roth IRA, the MyRA is also exempt from the rules requiring lifetime distributions after age 70½.     

Unlike a Roth IRA, however, there’s only one investment option: a U.S. Treasury bond offering the same variable interest-rate return as the one offered to federal employees through the Thrift Savings Plan Government Securities Invest­­ment Fund. So investors will have more peace of mind than usual, but the rate of return could pale when compared to other investments.

The same limits on availability that apply to Roth IRAs are also in effect for MyRAs. The phaseout range for 2015 MyRA contributions is $116,000 to $131,000 of modified adjusted gross income (MAGI) for single filers and $183,000 to $193,000 of MAGI for joint filers. This eliminates the MyRA option for many upper-income taxpayers.

Finally, and here’s the real kicker, once the account balance reaches the magic $15,000 mark, you must roll over the funds into an IRA. At that time, you can select from the usual menu of investment options.

Tip: Since you have to switch over eventually, consider just going straight to a Roth IRA.

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