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Getting America to Save

January 29, 2014

Article by Glen Mather:

I originally had no intention of listening to the State of the Union address. After all, the content is never a surprise, with bits and pieces being leaked weeks in advance. But when the address began, I was on a long drive, so I tuned in. Even though I reached home before the President’s speech finished, I idled in the driveway through its end.

While most of the speech carried few new ideas, imagine my interest as an IRA administrator when the concept of “myRA” was announced. Here are a few more details gleaned from senior administration officials: Enrollment in myRA would be voluntary, although there are rumors that it may require an opt-out for employees working at companies without a current retirement plan. The account can start with a $25 contribution, with automatic payroll deducted contributions of as little as $5 per month. Tax-free withdrawals could be made at any time (so I would assume that the contributions are not tax-free). Once the myRA account reached the $15,000 cutoff, it would be automatically rolled over to a Roth IRA. The true wrinkle of the myRA concept is the investment choice. It will be made for you. Not mutual funds, high growth stock or indexed funds. No, the only option is government bonds, chosen by your investment advisor – the government.

So is this a good idea? Well, if it gets more people to start saving, absolutely. The habit of putting some money aside on a routine basis is unassailable, no matter what your economic situation may be. After all, you can’t invest what you don’t have.

But if it produces a generation of savers who have no choice of their investments, it can breed dependence and indifference.

A self-directed IRA, whether a Traditional, Roth, SEP or Simple, is one where the client is in full and absolute control of their investment choices. Most ironically, what the President is proposing with this new savings plan seems to be exactly the same as a Roth IRA, but with much less choice.

Perhaps what is needed most is a publicity campaign focused on the myriads of retirement plan choices that we already have. There is little doubt that 401(k)s, 403(b)s, and 457 plans, along with the various types of IRAs, are great vehicles to prepare for retirement. Employer-matching and the tax benefits further incent the obvious need to augment Social Security with something more substantial and certain. These plans have attracted contributions and have grown to hold more than $9 trillion in retirement savings. Not exactly failure.

So let’s spread the word about the value of saving, especially tax-free, and let’s remember the benefit of taking reasonable risks – they offer a potential greater reward. Government incentives such as the Retirement Savings Contribution Credit produce amazing incentives to modest-income savers, yet few take advantage. MyRA may make a difference, or it may just further confuse an already confused taxpayer. The idea is laudatory, but the result is yet to be determined.