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myRAs for “Starter” Savings

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On November 4, 2015, the U.S. Treasury launched myRA (my Retirement Account) nationwide, to help bridge America’s retirement savings gap.  It is intended to overcome obstacles to saving for retirement, especially those with low income.  Treasury has expanded the ways that taxpayers can fund myRAs, which are a type of government-administered Roth IRA initially offered by Treasury in 2014.

MyRAs, generally.  In his 2014 State of the Union address, President Obama promised that he would take executive action to create myRAs, “starter” savings accounts that would be available through taxpayers’ employers and backed by the U.S. government.  MyRAs were described as being simple, safe, and affordable starter savings accounts to help low- and moderate-income taxpayers save for retirement.  A myRA is a government-administered Roth IRA authorized to hold only one type of investment, a U.S. Treasury security which earns interest at the same variable rate as investments in the government securities fund for federal employees.  There are no fees, they are low-risk (backed by the U.S. Government), and convenient. 

Like a Roth IRA.  MyRAs are subject to the same rules that apply to private Roth IRAs (see further discussion below about ROTH IRAs), including the MAGI-based eligibility for contributions, maximum annual contributions, and tax treatment of distributions.  Participants can save up to $15,000, or for a maximum of 30 years before the myRA will have to be rolled over to a private sector Roth IRA.  A rollover to the private sector allows savers to continue to grow their savings past the maturity of their myRA starter savings account, and allows more investment options.

Funding myRAs.  Until now, myRAs were available only to individuals who worked for an employer that offered direct deposit and was able to direct a portion of their paycheck to their myRA account.  Treasury has announced two additional ways that taxpayers can fund a myRA account:

…From a checking or savings account.  Taxpayers can set up recurring or one-time contributions to their myRA from a savings or checking account; and

…From a federal tax refund.  On their federal income tax return, taxpayers can direct some or all of their federal tax refund to their myRA. 

Opportunity for Parents/Grandparents.  For children or grandchildren with earned income, contributions could be made to the child’s or grandchild’s bank account (which is a “gift” that qualifies for the $14,000 annual exclusion) to fund the myRA account. 

Roth IRAs.  A Roth IRA is a type of individual retirement account (IRA) that allows an individual to make annual nondeductible contributions in amounts up to $5,500 (for 2015) (plus an additional $1,000 for those 50 and older), or 100% of compensation if less, reduced by the amount of contributions for the tax year made to all other IRAs.  For 2015, the allowable contribution phases out when modified adjusted gross income (MAGI) exceeds certain amounts, and no contribution is allowed where, for example, MAGI exceeds $193,000 for married taxpayers and $131,000 for single taxpayers and heads of household.   

Qualified Distributions.  Qualified distributions from Roth IRAs aren’t included in income.  These are distributions made after the 5-tax-year period beginning with the first tax year for which the taxpayer or the taxpayer’s spouse made a contribution to a Roth IRA established for the taxpayer, including a qualified rollover contribution from an IRA other than a Roth IRA.  Further, the distributions must be made: (1) on or after attaining age 59 ½; (2) at or after death (to a beneficiary or estate); (3) on account of disability; or (4) for a first-time home purchase expense up to $10,000.  For distributions that aren’t qualified distributions, the amount of distributions that are in excess of contributions are taxable, and the amount includible in income is also subject to the 10% early withdrawal tax unless an exception applies.