Starting November 4, 2015, a new government-back retirement account called myRA became available to the general public. It is designed to be a starter account that’s simple to understand and use. There are no account fees or minimum funding requirements, you can transfer as little as you want into the account each month, and your investment has a guaranteed rate of return backed by the Federal Government.
That means the money you put in your myRA is as safe as an FDIC insured savings account - and you'll earn a rate that could be 2 times what you get in a good savings account. The rate of return was 2.31% last year.
Using the myRA to house your emergency fund
One of the most common recommendations in personal finance is to build an emergency fund – an account with three to six months’ worth of expenses in it. The money should be easy to access and used during a serious emergency, such as a medical accident, loss of a job, or breakdown of your primary vehicle.
The myRA account may be a good place to keep your emergency fund as it is insured by the Federal Government, offers a guaranteed rate of return that’s higher than most savings accounts, and the contributions you make to the account can be withdrawn at any time.
Before considering all the pros and cons of keeping your emergency fund in a myRA account, let’s take a closer look at how the myRA account works.
Opening a myRA account
You can open a myRA account as long as you earned income in the United States during the last year and your modified adjusted gross income was below $131,000 in 2015. The maximum is $193,000 if you’re married and file taxes jointly, and the limits may change in the future.
To open an account, go to myRA.gov. You’ll need a Social Security number or Individual Tax Identification Number (ITIN), government ID, and be ready to list someone as a beneficiary. The account is linked to you, not an employer, so it doesn’t matter if you don’t have a steady job or change employers.
Three ways to fund your myRA account
Once you open a MyRA account, you can deposit money into the account in three ways.
- Direct Deposit: If you already have direct deposit set up with your employer, you can fill out a myRA direct deposit authorization form and have a portion of your pay sent to your account each pay period.
- Transfer from checking or savings: You can also choose to transfer money directly from a checking or savings account. This can be set up as a one-time transfer or a recurring transfer.
- From a tax refund: If you receive a tax refund, you can request that a portion of your refund be deposited in your myRA account. To do so, mark the savings box on the refund portion of your tax return. You’ll need your myRA account number and the routing number, which is 111925074.
You can contribute as little as you want to a myRA account; you can even set up a recurring transfer or direct deposit for $2 every month. Some other managed retirement accounts have minimum investment requirements, which can make getting started difficult. “The advantage of not requiring a minimum balance is individuals can start investing now,” says Sam Farrington, Founder and Financial Planner at SoundMind Financial Planning in Omaha, Nebraska. “It’s so important to start saving as early as possible!”
There is, however, a limit to how much you can contribute each year: $5,500 in 2015 or $6,500 if you’re 50 or older. The myRA account is a Roth Individual Retirement Agreement (IRA). If you have another Traditional IRA or Roth IRA, the annual limit applies to the total contributions made to all your accounts. The maximum contribution limit may rise or fall in the future.
myRA investments are U.S. Treasury bonds
The funds in myRA accounts are invested in United States Treasury savings bonds, a loan to the Federal Government. This is considered to be one of the least risky investments available because the Federal Government guarantees repayment, but there are risks to consider
The interest you’ll earn on the money in a myRA account may change from one year to another. In 2014, funds earned 2.31 percent. Over the last decade, the average annual return was 3.19 percent. This may be less than what one might earn with other investment options, but the low rate reflects the fact that this is a low-risk investment. You won’t lose money by investing in a myRA account.
Withdrawing money from a myRA account
If your myRA account has $15,000 in it or is 30 years old, the account will be closed, and you’ll have to transfer, or rollover, the funds into a private-sector Roth IRA. If you want, you can also transfer the funds at any point.
As with a Roth IRA, the contributions made to the account can be withdrawn at any time. When you withdraw money, your contributions will automatically be taken out first. You can call 855-406-6972 or make a request online to either transfer the money to a linked checking or savings account or receive a personal check.
A withdrawal request may take up to three business days to process, but generally are processed the same day if they’re received by 9 p.m. ET. Once the request is processed, it may take up to five additional business days for the funds to be available and another few days before the check arrives or the transfer to your account is complete.
Unlike with contributions, the earnings in the account must be qualified before you withdraw them or you will have to pay income tax plus a ten percent penalty. To qualify Roth IRA and myRA earnings, the account must be open for five years, and you must meet one of the following criteria:
- Be 59 and a half years old.
- Use the money for a first-time home purchase, there’s a lifetime maximum of $10,000.
- Become disabled.
- Give the money to a beneficiary after your death or disability.
Who should open a myRA account?
The lack of fees, single investment option, and guaranteed returns make myRA a good option for some savers.
Pamela Horack, CFP®, Founder of Pathfinder Planning LLC in Lake Wylie, South Carolina says, “I'm a fan of the MyRA program for certain groups that need help beginning to save.” She’s found it can be particularly useful for low-paid workers as they can get started even if they only have $5 to spare.
On the other hand, some people may be better off managing their own accounts. “More advanced savers, and young investors, would be better suited for a Roth IRA in which they can diversify their holdings and take advantage of potentially higher rates of return,” says Patrick Daniels, Financial Planning Analyst at Precedent Asset Management in Indianapolis, Indiana.
A private-sector Roth IRA has the same contribution limits and withdrawal rules, but you can invest in thousands of different financial products, including individual stocks. You may be able to replicate the myRA investment by buying 30-year Treasury Bonds within a private-sector Roth IRA, but you may need to pay a transaction fee each time you purchase a bond.
myRA versus other types of retirement accounts
The myRA account is intended as an option for individuals who don’t have an employer-sponsored retirement account and don’t feel comfortable, know how, or know about private-sector IRAs. If you have a 401(k), 403(b), or another type of employer-sponsored retirement account, you may be better off putting savings there. Some employers match employee contributions, which can significantly increase your savings rate.
Another difference is that employer-sponsored retirement accounts allow you to defer taxes, as is the case with a Traditional IRA. This means that you’ll pay taxes on the contribution and the earnings when you withdraw the money, but you don’t pay taxes now. In practice, you’ll write off – subtract – your contribution to your income for the year when filing taxes.
You may be able to choose a Roth version of an employer-sponsored account. Similar to Roth IRAs and myRA, you’ll pay taxes on the contribution now (no write-off), but the earnings and therefore distributions in retirement are completely tax-free.
The final word on a myRA for your emergency fund
If you’re saving for retirement with an employer-sponsored plan and don’t contribute to other IRAs, the myRA could be a good place to keep your emergency fund. However, there are several drawbacks to consider. If you already have an emergency fund, the annual contribution limit means it may take several years to transfer the money into the myRA account. A large emergency may deplete more than a year’s worth of contributions. Additionally, depending on your monthly expenses, the $15,000 limit may not be enough to accommodate an entire emergency fund.
Even with its drawbacks, the myRA account can be a good option for an emergency fund because there are no account management fees and you’ll earn more interest than you would with most savings accounts. The investment is also backed by the Federal Government and the interest and principal are guaranteed. Although, to avoid paying penalties, don’t withdraw interest that isn’t qualified.
It may take up to two weeks to receive an electronic transfer or personal check when you withdraw money from a myRA. In case you’ll need money right away, you may want to consider keeping part of your emergency fund in an account that’s easier to access or keeping a credit card that’s designated for emergencies and then paid off with withdrawn funds.
Those looking for a place to store an emergency fund may also consider a high-yield checking account or savings account.
[Check out the best online savings accounts here.]
A savings account would probably be more ideal for money you want to store away and not regularly access. Some checking accounts offer up to three percent interest, however you will need to meet monthly requirements and jump through several hoops to receive the high interest rate. You may need to set up direct deposits into the account (transfers from another bank account may count), make a particular number of purchases with the debit card each month, or sign up for electronic statements. It can be a lot of work to manage and track compared to the no-fee and easy-to-manage myRA or a 1.00% APY or higher savings account.