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The federal government recently introduced a new IRA called the myRA. It's much like a Roth IRA in that you can contribute up to $5500 a year. You can participate only if your income is less than $191,000 if you're married and filing jointly or $129,000 if you're filing single. And like a Roth IRA the contributions you make are after-tax and the money is then tax-free when you withdraw it so long as you’re age 59 1/2 or older. And the minimum contribution to a myRA is just $25, which is lower than that for a Roth IRA. You can also withdraw your contributions (but not the interest on them) anytime you wish with no penalty.
Where the similarities end
The big difference between a myRA and a Roth IRA is your investment options. If you go to a brokerage for your Roth IRA you could choose from literally thousands of different index funds, mutual funds, bonds and individual stocks. In comparison, the myRA offers only one investment option – the G fund. The good news here is that unlike other investments, your balance in a myRA never goes down and there is an FDIC-like guarantee. The G fund generally pays more interest than you would get with a savings account but it's still not a great ROI. For example in 2012 the G fund returned just 1.47%, which isn't much but is still more than the 1% you could earn with an online savings account.
The most that you can put into a myRA is $15,000. When you reach that amount you must then roll it over into a Roth IRA in whatever brokerage you choose.
The good and not-so-good of myRAs
MyRAs are basically for people that have no retirement plan where they work and could contribute a little bit out of every paycheck towards retirement. The biggest pro of the myRA is that the US treasury backs your investment so it can never lose value. Since a myRA doesn't require a minimum investment and no fees for opening the account or maintenance, even people on the tightest of budgets should be able to start saving for retirement. In addition, a myRA can be more user-friendly than a Roth IRA because it eliminates the need to choose from a bewildering array of different investment options.
The biggest downside of a myRA is, of course, the rate of return. The only thing you can invest in with a myRA is the G fund. It earns interest at the same rate as money invested in the government securities fund for federal employees. This fund has returned 3.19% annually over the past 10 years. In comparison, people who invested $1000 a year in the S&P 500 index during those 10 years would have earned an average return of 7.67%. What this translates into is that the person who had invested in the S&P 500 index would have made $16,268 while a person who had invested the same amount of money in a myRA would've earned $12,861 or $3407 less.
The bottom line
The bottom line for most people is that the better option would be to get a low-cost Roth IRA. As you have seen, the same amount of money invested in it would generate a better return than the myRA even if you invest only in very safe index funds or mutual funds. In the end, having a retirement plan is the most important thing to do. According to CheatSheet.com, 1 out of 3 Americans do not have retirement savings. Do not be part of this statistic and start saving for your retirement. If you have debts like mortgages, auto loans or credit card debts, make sure you work hard to pay this off. Use credit card consolidation to make the monthly payments easier. Not having a retirement fund is bad enough. If you have debt too, that can make things extra hard.