Created just a few years ago in 2014, the My Retirement Account (myRA) program will end, according to the U.S. Department of the Treasury. As part of the Trump Administration’s effort to slim down wasteful spending where possible, the Treasury has decided this short-lived Roth IRA backed by the government isn’t cost effective.
First Some Background on Roth IRAs
A Roth IRA is an individual retirement account that’s treated as a traditional IRA except where special rules apply. For 2017, individuals can make annual, nondeductible Roth IRA contributions up to $5,500, or $6,500 for those age 50 and older (or 100% of compensation if less). The total contributions for the tax year must be reduced by amounts that are put into all other IRAs.
Allowable contributions for 2017 are phased out when modified adjusted gross income (MAGI) exceeds certain limits. The ability to contribute disappears completely when MAGI is over $196,000 for married taxpayers and $133,000 for single taxpayers and heads of household.
The main attraction of a Roth IRA is that qualified distributions from these accounts aren’t included in the accountholder’s income, therefore not taxed. A qualified distribution is one that is made after a five-tax-year period that begins with the first tax year for which the taxpayer made a contribution to a Roth IRA that’s established for the taxpayer or by rolling over an amount from another type of IRA.
Qualified distributions can also be made:
- On or after the accountholder attains age 59 ½;
- At or after death (to a beneficiary or estate);
- On account of disability; or
- For a first-time home purchase expense up to $10,000.
For distributions that aren’t qualified, the amount that is in excess of contributions is taxable, and the amount includible in income is also subject to the 10% early withdrawal tax unless an exception applies.
In 2014, myRAs became available through employers, backed and administered 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. Based on a directive from then-President Obama, the Treasury introduced the myRA program.
A myRA is a Roth IRA authorized to hold only one type of investment, that is, a U.S. Treasury security which earns interest at the same variable rate as investments in the government securities fund for federal employees. The same rules that apply to private Roth IRAs also apply to myRAs, including the MAGI-based eligibility for contributions, maximum annual contributions and tax treatment of distributions.
MyRA participants have been permitted to save up to $15,000, or for a maximum of 30 years, in a myRA account. When either of these limits is reached, the account must be rolled over to a private sector Roth IRA. This rollover allows savers to continue to grow their savings past the maturity of their myRA starter savings account.
The Retirement Account Will Retire
A recent review of the overall success of the myRA program shows that while demand for — and investment in — these accounts has been extremely low, the cost to taxpayers for managing the accounts has been nearly $70 million. On that basis, the Treasury announced on July 28th that the myRA program will phase out over the coming months.
As a result, new enrollments are no longer being accepted. At this time, existing myRAs remain open and accessible, and individuals can continue to manage their accounts until further notice. Individuals can make deposits and their accounts will continue to earn interest. Funds in myRAs remain in an investment issued by the Treasury Department.
Participants are encouraged to visit https://www.myra.gov/ or call their myRA customer support numbers if they have questions. Notices from the Treasury Department will be going out to account owners, detailing the coming changes and providing the necessary information on the next steps account owners should take and relevant deadlines for the transfer and closure of their accounts.
U.S. Treasurer Jovita Carranza, sought to assure accountholders, saying “[w]e will be communicating frequently with participants to help facilitate a smooth transition to other investment opportunities.” She added that ample private sector investments exist that offer no account maintenance fees, no minimum balances and safe investment opportunities.
Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 26 years. The firm was commended as a SmartCPA Reader’s Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.