Federal myRA program is out, but advisers say other options abound

Brent Singleton: Social security only is designed to replace a portion of your income.

Paula Dougherty: MyRA wasn't as successful as the government had hoped.

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There’s a retirement crisis brewing in America. While it might seem like a standard employee benefit for many, the most recent U.S. Census found half of the nation’s employees – about 55 million people – don’t have a retirement savings account at work.
 
“If your employer does not provide something, I would go to them and ask why,” said Faith Irmen, president and owner of Qualified Pension Services Inc. “You need to pay yourself in the future; nobody else is going to do it.”

Following a joint resolution signed last month by President Donald Trump, the options now are fewer for those looking to save outside a work-sponsored plan – but, in a roundabout way, local financial planners say that might be a good thing.

The departing myRA program was a no-fee, no-minimum balance, nondeductible Roth individual retirement account for people with incomes below $131,000 and couples with incomes under $193,000.

According to the U.S. Treasury Department, it was designed for people without access to employer-sponsored retirement plans like 401(k)s. Savers could contribute up to $5,500 per year and the money went into a safe, interest-bearing account with the Treasury.

“The myRA program was created to help low- to middle-income earners start saving for retirement,” said Paula Doughtery, an adviser withAchieve Private Wealth, a private practice of Ameriprise Financial Services Inc., via email. “Unfortunately, there has been very little demand for the program.”

The Treasury announced July 28 it would begin winding down the myRA program after an internal review found it was not cost effective. An Obama-era program, the review found demand for and investment in myRA had been low and taxpayer burden high – having paid nearly $70 million to manage the program since 2014 and predictions of $10 million a year going forward. Comparatively, only about 30,000 myRA accounts were opened with about $34 million in contributions.

“It seemed like a government tax scheme to me from the very start,” Irmen said. “It was a Roth account, because the government does not like 401(k) accounts. They don’t collect any taxes on 401(k) accounts right now.”

Through a standard employer-based 401(k), 403(b) or IRA, any money saved is done so pretax. Federal taxes are collected when money is withdrawn, usually many years down the road. Through a Roth IRA, money goes into the account after taxes and the individual saver does not pay taxes when withdrawing, meaning the federal government makes its cut on the front end, not the back end.

With the myRA program a well-intentioned failure, potential savers are looking elsewhere.

Retirement options
While it’s generally agreed people should save for retirement, it’s well established many don’t. According to the AARP, workers are 15 times more likely to save for retirement if they have access to a plan at work, and the U.S. Department of Labor notes most workers can set up their own IRA – but don’t – and in 2015, only 11 percent of U.S. households contributed to IRAs. Heim Young & Associates Inc. partner Brent Singleton said with so many options, that’s a big mistake.

“Social security is only designed to replace about 25 to 40 percent of your income when you retire,” he said. “Most financial planners agree you need about 80 to 85 percent of your income to live comfortably. That leaves a big gap.”

Singleton said the easiest and most prevalent form of savings is the employer-sponsored 401(k) account.

“These are usually direct-hold, meaning they skip your checking account,” he said. “That is better from a behavior standpoint – you’re never tempted to spend it because you never see it in there.”

The standard IRA account is the second most popular. For 2016, the annual contribution limit is $5,500, and $6,500 for savers over 50 years old, according to the Internal Revenue Service.

Outside of the myRA program, Doughtery said not everyone can set up a Roth account, and even if they can, they may not qualify to take full advantage of it.

There are a few requirements: First, the saver must have taxable compensation, pretty standard, but Doughtery said it only gets harder from there.

“If your taxable compensation is at least $5,500 in 2017, you may be able to contribute the full amount,” she said. “But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your modified adjusted gross income and your income tax filing status. Your allowable contribution may be less than the maximum possible, or nothing at all.”

Savings mode
Why aren’t people saving? Doughtery says there often are competing factors.

“Younger people often have more urgent needs such as school, school loans, paying the rent, buying a car or first home, paying off credit card debt,” she said.

“As people get older, and they begin to expand their family, the expenses of having and raising children come in the picture, along with helping other family members, in some instances.”

Singleton references the “latte factor,” from David Bach’s book “The Automatic Millionaire: A Powerful One-step Plan to Live and Finish Rich.”

“The latte factor is something you could give up and save that money for retirement,” he said. “If you drank free coffee at work instead of a $5 latte everyday, you’d save $25 in that first week.”

Latte savings can add up for the young. Through starting early, saving small amounts and discipline, Singleton said there’s no reason some one can’t have $1 million set aside by the time they retire.

“Now, if you wait until you’re 45 to start saving, it’s a whole different ballgame,” he said.

In the end, each individual is different, but Irmen said it all boils down to being smart with your money.

“If an employer is matching your 401(k) and you’re not using it, you’re leaving money on the table,” she said. “It’s simple, really. Get your budget in order, start saving early and save as much as you can. It’s not rocket science.”