Wealthy Investors Aren't Likely to Benefit from myRA

Individuals who don't work for the government can find plenty to envy in the Thrift Savings Plan, the equivalent of a 401(k) for government workers. Participants are able to choose from an ultra-svelte list of core index funds, all with teeny tiny expense ratios of less than 4 basis points. But the crown jewel of the TSP has long been the G Fund. Offering a return in line with intermediate-term government bonds but without any downside risk, the G Fund offered TSP participants something that non-TSP participants couldn't buy on their own.

Until now, that is. Investors in myRA, a new savings vehicle that will be launched soon as part of a Treasury Department initiative, will hold investments similar to the G Fund. Thus, myRA investors will earn a yield akin to what they would get on intermediate-term Treasury bonds but without the possibility of any principal losses.

With bond yields as low as they are today, and the yield differential between intermediate-term government bonds and cash instruments also quite compressed, it might be tough to get excited about the return prospects for myRA. After all, the G Fund has returned just 3.34% on an annualized basis over the past decade.

But that figure has been severely depressed by the declining interest-rate environment that has prevailed since 2009. In a better interest-rate environment, the virtues of a higher-yielding guaranteed investment will be more readily apparent. When rates rise, myRA investors will be able to enjoy all of the benefits of higher yields without the potential for principal losses that bond-fund holders face when rates grind higher.

Investments in myRA are also fairly liquid; individuals can withdraw their contributions at any time and for any reason without taxes or penalty. That stands in contrast to stable-value funds, which have investment characteristics similar to the G Fund (though not fully guaranteed) but must be held within the confines of a company retirement plan. Thus, stable-value assets can't be tapped without a penalty prior to retirement age.

Indeed, the prospect of a highly liquid, higher-yielding guaranteed savings vehicle may have higher-net-worth investors--and not just the beginning investors who are the targets for myRA--licking their chops. But should wealthier investors also consider setting up a myRA? The answer, alas, is probably not. Higher-income investors may not be able to make a myRA investment at all. And even if they can, they should think hard about whether such an investment should crowd out other investment options.

An IRA With Training Wheels
One thing is clear: myRA was not created with high-net-worth investors in mind. Rather, it was crafted as an IRA with training wheels, especially for employees who don't have access to a company retirement plan such as a 401(k).

Employees will be able to steer payroll deductions into their myRAs, making contributions as low as just a few dollars per paycheck. Because investments in the G Fund equivalent are guaranteed, there's no risk that the nascent saver will be spooked by bear markets. The accounts also offer a lot of liquidity, enabling participants to withdraw their contributions at any time. Thus, an investment in myRA could reasonably multitask as an individual's emergency fund while also helping the investor build up funds for a short-term goal, such as a home down payment, or serving as a launch pad for a long-term retirement investment in a Roth IRA. Investors in myRAs won't receive matching contributions, which many employees receive when they invest in a company retirement plan, but they may be eligible for a saver's credit if their income falls below the thresholds outlined here.

Practical Impediments for Higher-Income Investors
As useful as myRA could be for starting savers, however, its applications for higher-income investors--even those eager for access to a higher-yielding guaranteed investment--are apt to be limited. Not all employers will offer myRA, for starters. In addition, the maximum amount that anyone can hold in a myRA is $15,000, consisting of both contributions and investment earnings. Once an investor has accumulated the maximum in his or her myRA account, the training wheels come off and the investor has to move the money to a private Roth IRA through a brokerage or mutual fund firm. The ability to hold just $15,000 in a higher-yielding silo may not be enough of an enticement for wealthier investors to set up a separate myRA account.

Moreover, the same contribution and income limits that apply to a Roth IRA also apply to myRA, and that could put the accounts out of reach for higher-income workers. Single taxpayers earning more than $129,000 cannot make a myRA contribution, and the threshold is $191,000 for married couples filing jointly. Importantly, there's no "backdoor" option for myRA as there is for IRA investors. Investors above the Roth IRA income thresholds can get into a Roth IRA by opening a traditional nondeductible IRA--for which there are no income limits--and converting their balances immediately thereafter. But the myRA offers no such workaround for higher-income folks. All myRA contributions consist of aftertax dollars, and qualified withdrawals come out on a tax-free basis.

And even if higher-income workers could get into myRA, they will want to think twice about doing so. That's because the combined amount you could contribute to a myRA and an IRA is $5,500 for people under 50 and $6,500 for those over 50. Thus, by making a myRA contribution, you'd be eating away at the amount that you could contribute to an IRA.

That's an important consideration for two reasons. First, accounts that receive Roth treatment--that is, tax-free withdrawals--are often considered a good receptacle for assets that will appreciate the most over time. Thus, investors should prefer to use their Roth wrappers for stocks, which they can hold in Roth IRAs, rather than the lower-returning securities that will populate myRA accounts. Moreover, given that Roth IRA assets are typically the last in the spending queue under standard retirement-withdrawal sequencing rules, investors should question whether it makes sense to use their valuable IRA slots to instead hold a short-term myRA that will likely be liquidated earlier in retirement.