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Treasury explains and promotes benefits of myRAs for employees of small businesses

May 19, 2014

On its website, the U.S. Department of the Treasury seized the occasion of “National Small Business Week” (which is sponsored by the White House and Small Business Administration to highlight the crucial role that small businesses play in our economy) to encourage small business owners to learn more about making the myRA (My Retirement Account) program available to their employees. In doing so, Treasury has provided more details on the working of the myRA programs it will roll out later in 2014.

Background on myRAs. In his 2014 State of the Union address, President Obama promised that he would take executive action to create “starter” savings accounts (“myRAs”) that would be available through taxpayers’ employers and backed 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. The President subsequently directed Treasury to effectuate this program (see Weekly Alert ¶  2  02/06/2014).

Background on Roth IRAs. A Roth IRA is an individual retirement account (IRA) that is designated as a Roth IRA when it’s established. (Code Sec. 408A(b)) It’s treated as a traditional IRA except to the extent that special rules apply to it. (Code Sec. 408A(a))

An individual can make annual nondeductible contributions to a Roth IRA in amounts up to $5,500 (for 2014) (plus an additional $1,000 for those 50 and older), or 100% of compensation if less, reduced by the amount of contributions for the tax year made to all other IRAs. The allowable contribution phases out ratably (in $10 increments) over the following levels of modified adjusted gross income (for 2014): for joint filers, $181,000 to $191,000; for married persons filing separately, $0 to $10,000; and for single taxpayers and heads of household, $114,000 to $129,000. (Code Sec. 408A(c))

Qualified distributions from Roth IRAs aren’t included in income. These are distributions made after the five-tax-year period beginning with the first tax year for which the taxpayer or the taxpayer’s spouse made a contribution to a Roth IRA established for the taxpayer, including a qualified rollover contribution from an IRA other than a Roth IRA, and that are made: (1) on or after attaining age 59 1/2; (2) at or after death (to a beneficiary or estate); (3) on account of disability; or (4) for a first-time home purchase expense up to $10,000. Distributions that aren’t qualified distributions are treated as made first from contributions to all of an individual’s Roth IRAs and are nontaxable to that extent. Distributions in excess of contributions are taxable, and the amount includible in income is also subject to the 10% early withdrawal tax unless an exception applies. (Code Sec. 408A(d))

Treasury promotes myRAs. On its website ( http://www.treasurydirect.gov/readysavegrow/start_saving/myra.htm ), Treasury stated that in late 2014 it will begin offering the myRAs program, providing individuals with a simple, safe and affordable way to start saving for retirement. MyRAs will be initially offered through employers.

Treasury highlighted these key features of myRAs:

 

…As little as $25 to open an account.
…Add to savings through regular payroll direct deposit—$5 or more every payday.
…No fees.
…MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal
  • employees.
  • …MyRAs
will not be limited to one employer—the account will be portable.
…MyRA contributions can be withdrawn tax-free.
…Earnings can be withdrawn tax-free after five years if the saver is 59 1/2.
…Account holders can build savings for 30 years or until their myRA reaches $15,000—whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.

 

Q&As flesh out details. As further explained in Treasury’s “myRA: Top Questions & Answers,” the myRA account will hold a new “add on” Treasury security in an IRA; as a result, savers will add to the value of a single security with each contribution they make, rather than buying additional securities. The retirement savings account will be a Roth IRA account and have the same tax treatment and follow the rules of Roth IRAs. The same tax advantages that apply to Roth IRA will also apply to myRAs. Information will be private and secure.

One of the many benefits of myRAs is their portability. An individual who changes jobs can continue to add savings to an existing myRA account by setting up deposits through any employer that offers payroll direct deposit. An individual with multiple jobs will be able to use direct deposit from each paycheck to contribute to a single myRA.

An individual’s deposits will be automatic every payday, and that the security in the myRA account, like other U.S. savings bonds and Treasury securities, will be backed by the U.S. Treasury.

Employers will not be required to make myRA available to their employees. However, Treasury’s research indicated that the myRA program will fill a void for workers and employers alike—especially employees without an employer-sponsored plan and employees who do not qualify for their employers’ existing retirement plans.

Treasury clarified that myRAs weren’t meant to replace employer 401(k) plans. MyRAs are intended for workers who don’t have access to an employer-sponsored retirement plan. Treasury pointed out that employees who are eligible for an employer-sponsored plan will continue to have many good reasons to participate in their employer plans rather than the myRA program.

Treasury said it will finalize procedures for rollovers to private-sector accounts (after the account is 30 years old or has reached its $15,000 maximum) when it launches myRAs later in 2014.

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