The new myRA retirement savings accounts, with principle fully guaranteed by the U.S. Government, are up-and-running. Your clients can learn about them and sign up for an account online at myRA.gov.
The accounts are pretty much as advertised when announced last year by the Obama administration.
The main limits of myRA are: 1) the same contribution limits that apply to Roth IRAs; 2) a $15,000 cumulative account limit; and 3) only one investment choice, the Government Investment Fund (G-Fund) of the Federal Thrift Savings Plan.
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Once the account reaches $15,000, it must be transferred or rolled over to a regular Roth IRA, and the same owner can't ever open another myRA again. (It's a once-in-a-lifetime opportunity!)
It doesn't make for a great retirement plan vehicle.
Actually, though, it may work fine to help grandparents set money aside for a grandchild's college education. Here's how:
Let's say Grandpa earns a few thousand dollars per year doing part-time work or from self-employment. Each year, he contributes $2,000 (as after-tax money) to a myRA.
He claims a Saver's Credit of $1,000 per year, so his actual out-of-pocket cost is just $1,000. For 2016, a Saver's Credit is available to single filers with AGI up to $30,750 and joint filers with AGI up to $61,500.
The myRA money will compound at the G-Fund's current interest rate, which is based on the weighted average yield of Treasury securities with maturities of four years or more.
For the last year, the return has been 2.05%. If that rate holds over the next seven years and Grandpa makes the same contribution each year, the myRA will grow to $14,891. On a $7,000 total out-of-pocket investment, the internal rate of return is about 19% annually, guaranteed.
When the child reaches college age (and after the myRA has been held at least five years), Grandpa takes a full distribution, which is tax-free and penalty free because he is over age 59 ½, and uses the money to help the grandchild through college.
Actually, Grandpa could keep doing this same strategy for any number of years, except myRA would need to be converted to a regular Roth IRA after the balance reaches $15,000.
Then he would have to find an insurance company to guarantee a Roth IRA annuity rate equivalent to about 2.3%. If so, an even larger college fund could be accumulated tax-free at a guaranteed 19% return.
Of course, Grandpa also would also need a steady source of retirement wage or self-employment income that pays at least as much as the Roth contribution, but not enough to exceed the Saver's Credit's AGI limits.
The online sign-up for myRA, where most of the action probably will be, is operated by Comerica Bank as financial agent of the U.S. Treasury. To enroll, an individual needs only a Social Security number, driver's license (or passport), name, date of birth, and beneficiary.
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