In his recent State of the Union Address, President Obama unveiled something new: a retirement savings account to "help" Americans build a nest egg, coining it the "MyRA."
Something immediately felt wrong about the proposal... but I couldn't put my finger on it.
So I researched the new MyRA and found details to help you understand just how it works.
But I also saw some potential dangers there that you need to prepare for now...
What MyRA Really Means
Like most government programs, getting to their essence can take some sifting. So I've distilled here what I think are the principal components of MyRA.
- Individuals earning up to $129,000 and couples earning up to $191,000 are eligible if their employers offer the account;
- The minimum initial contribution is $25, then at least $5 through payroll deductions;
- The maximum contribution is $5,500 per year ($6,500 if over 50 years of age);
- Once the balance reaches $15,000 or has existed 30 years, it must be rolled into a Roth IRA;
- Total contributions to a person's IRAs cannot exceed $5,500 annually;
- Like a Roth IRA, withdrawals will grow and be redeemable tax-free;
- Principal can be redeemed any time, but earnings withdrawn before age 59 ½ are taxable and subject to 10% penalty; and
- Only one investment available: Treasury bonds paying variable interest-rate return
MyRA Is Set to Lose the Inflation Battle
Essentially, the MyRA is like a Roth IRA that your employer opens for you, allowing for low individual contribution requirements.
But if that's what you want, you can already set up your own Roth IRA with a no-fee, no-minimum account requirement at discount brokers like TD Ameritrade or E*Trade. And then your investment options are practically limitless.
In his speech, Obama said that "MyRA guarantees a decent return with no risk of losing what you put in." So let's look at the underlying investment a little more closely.
Your MyRA contributions would go into a variable interest rate bond investment, comparable to the Government Securities Fund in the Thrift Savings Plan (TSP) for federal employees.
That fund's recently been paying 2.5%, which admittedly is way better than the 1% you can get from the highest yielding savings accounts. And that looks OK, until you consider... inflation.
Right now official U.S. inflation has been 1.5% through the 12 months ended December 2013. If instead we look at a truer inflation rate, like the more realistic one calculated by ShadowStats, the emerging picture is altogether different.
Shadowstats finds inflation running at 5%, rather than the more benign "official" 1.5%. At 5% inflation, MyRA investors will be losing 2.5% annually.
With interest rates near all-time historic lows, odds are rates will go higher, not lower. And as interest rates rise, the MyRA could find it increasingly challenging to offer an attractive return to investors.
You've Just Become the Government's New Lender
It's no secret that the United States is running out of buyers for its bonds.
China, the largest foreign owner, has been reducing its purchases and has repeatedly said it has enough. Nations worldwide engaged in their own quantitative easing are busy buying their own bonds. Now, the Fed itself has begun the tapering process.
As the U.S. debt and deficits continue to balloon, the government is desperate for a new source of funding. Obama's proposed MyRA looks to Americans to buy up its "junk bonds."
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.