Many small businesses would love to offer a retirement plan for their employees, but administering retirement plans is extremely costly and time consuming for small entities. But that doesn’t mean saving for retirement shouldn’t be a priority.
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In his State of the Union address in January, President Obama announced his “starter” retirement plan, the MyRA, that small business owners can set up to create retirement plans for their employees. Accounts will be funded with after-tax payroll deductions, the minimum investment will be $25 and regular contributions in the form of payroll deductions can be as low as $5. Essentially, it works like a ROTH IRA in that the contributions are not tax deductible. The monies that go into the account have already been taxed. By the same token, distributions upon retirement will not be taxable.
There will be no employer match and no employer participation with these plans. The Treasury Department will select a private sector firm to take care of the administration of the accounts to make it easier for savers to keep their accounts when they switch or leave jobs.
The principal balance will be guaranteed to never decrease in value under the plan, and the interest rate will be tied to short-term Treasuries. Once the balance in the account hits $15,000 or 30 years has elapsed, whichever happens sooner, the account will be rolled over tax free to a regular ROTH IRA account.
According to the White House, these plans will be “Available to millions of middle class Americans through their employer. This saving opportunity would be available to the millions of low- and middle-income households earning up to $191,000 a year. 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, in their accounts before transferring their balance to a private sector Roth IRA.”
The Pilot Program for the MyRA is underway and is expected to take off in 2015. While the returns seem low, the risk is also minimal and for those with lower income, and the ability to contribute small amounts on a regular basis is attractive. An added incentive is the possibility of taking the retirement tax credit if your income level is are low enough.
Think of the account as a savings bond. The administration says that investments in a MyRA will be backed by a savings bond-like security, with the same variable-interest-rate return offered by the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan. That return isn’t exactly world-beating, especially when interest rates are low— the federal fund returned 1.47% in 2012, according to The Wall Street Journal with an average annual return of 3.61% from 2003 through 2012. But the value of the account would never go down.