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The new MyRA accounts—and a possible surprise for investors

The new MyRA accounts—and a possible surprise for these investors

The new retirement savings vehicle that President Obama proposed in his state of the union address would give Americans with household income below $191,000 a year access to an investment that is similar to the G fund in the Thrift Savings Plan (TSP). The TSP is a retirement savings plan only available to federal employees.

The target audience for the MyRA plan is employees who do not have access to an employer-sponsored retirement plan. Companies do not have to administer or contribute to the plan.

According to the Treasury Department, 100% of any contribution goes into this new style of investment account and will be invested in a Treasury security similar to the TSP's G fund. The new Treasury securities will pay the same rate of interest as the government’s G fund. This fund paid an average of 3.45% from 2003 - 2013. The MyRA account will function like a Roth IRA, which allows savers to invest after-tax dollars and withdraw the money in retirement tax-free.

Anyone who withdraws the interest they earned in the account before age 59 1/2 will have to pay taxes and possibly incur an additional penalty, just like a Roth IRA.

In effect, the investment is secure but may not be very profitable for those planning to enhance their retirement income due to the low interest rate. It is also likely the government will use the money to finance government operations as has been done with the G fund when the government is about to hit or has already hit the debt ceiling limit.

The TSP’s G Fund has sparked controversy among its investors because, when a new debt ceiling has not been approved, the government has suspended investing new money into the Treasury securities or borrows money from the G Fund securities to avoid hitting the debt ceiling. The government calls this a debt-issuance suspension period.

The new MyRA accounts would presumably be treated in the same way as the Treasury securities in the G fund which is a model for this fund.

Presumably, having a large number of Americans using the MyRA funds would significantly increase the money available to the government to spend to finance government operations.

The Treasury Department will begin a pilot program at the end of 2014 with a few companies. Employees will be able to open an account for as little as $25 and contribute as little as $5 each payday to add to the account. When an investor’s balance reaches $15,000 -- or after 30 years – investors in the MyRA program will have to roll the MyRA into a regular Roth IRA.