Virtual CFO Services - On its website, the U.S. Department
of the Treasury has provided more details on a retirement plan option it will
administer directly for employees of private sector companies. It's called the
myRA (my Retirement Account), it's a type of Roth IRA aimed at employees with
no other retirement plan, and it's invested in a unique U.S. Treasury security.
AB Tax Accounting observation: Although
Treasury materials consistently describe myRAs as a new type of Roth IRA, IRS
hasn't issued guidance of any sort addressing this new variation. It appears as
if Treasury will be the exclusive provider of information about this new
retirement avenue.
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 2015) (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.
For 2015, the allowable contribution phases out ratably (in $10 increments)
over the following levels of modified adjusted gross income (MAGI): for joint
filers, $183,000 to $193,000; for married persons filing separately, $0 to
$10,000; and for single taxpayers and heads of household, $116,000 to $131,000.
(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 591/2; (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))
Background on myRAs. In his 2014 State of the
Union address, President Obama promised that he would take executive action to
create myRAs, a “starter” savings accounts 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). Treasury issued some preliminary promotional materials on
myRAs in May of 2014 (see Weekly Alert ¶
21 05/22/2014).
Now, Treasury has launched a multi-faceted
website offering more detailed information, including how to actually sign up
and get going on retirement savings through myRAs.
What is a myRA? In essence, a myRA is a
government-administered Roth IRA authorized to hold only one type of
investment, described as a “new United States Treasury security which safely
earns interest at the same variable rate as investments in the government
securities fund for federal employees.” The latter fund is described as having
an average annual rate of 3.39% in the 2003—2013 period. The myRA holder pays
no fees for maintenance of the account.
AB Tax Accounting observation: The reference
to the government securities fund appears to be a reference to the G Fund,
i.e., the Government Securities Investment Fund, which is one of the investment
choices for federal employees' thrift savings plans. On the federal
government's thrift savings plan (TSP) website
(https://www.tsp.gov/investmentfunds/fundsheets/fundPerformance_G.shtml), the G
Fund is described as investing exclusively in a nonmarketable short-term U.S.
Treasury security that is specially issued to the TSP. The earnings consist
entirely of interest income on the security. The payment of G Fund principal
and interest is guaranteed by the U.S. government, and, as such, the G Fund
investment is not subject to credit (default) risk. The G Fund interest rate
calculation is based on the weighted average yield of all outstanding Treasury
notes and bonds with 4 or more years to maturity. As a result, participants who
invest in the G Fund are rewarded with a long-term rate on what is essentially
a short-term security.
A myRA is subject to the same rules that apply
to private Roth IRA, including the MAGI-based eligibility for contributions,
maximum annual contributions, and tax treatment of distributions.
MyRAs belong to their owners and are not
associated with any employer. This way savers can continue to use the same myRA
account even if they move to a new job. They just need to set up direct deposit
with the new employer. And if savers have more than one job, they can request
contributions to be set up through each employer (although total contributions
from multiple sources can't exceed the Roth IRA annual contribution limits).
Who can open a myRA? Currently, myRAs are
available only individuals who work for an employer that offers direct deposit
and is able to direct a portion of their paycheck to their myRA account.
Treasury says that in the future it will open up the myRA to others (presumably
to self-employeds and employees that don't work for a company that offers
direct deposit).
How to open a myRA and contribute to it. The
only way to open a myRA is on Treasury's website. The individual then starts
funding the account by submitting a direct deposit authorization (provided by
Treasury) to his or her employer. Contributions in the amount indicated by the
employee are made each pay period and are direct-deposited into the employee's
myRA. The funds are then invested in a new type of U.S. government security
designed for myRAs.
Automatic myRA rollover to private Roth IRA.
Participants can save up to $15,000, or for a maximum of 30 years, in their
myRA account. When either of these limits is reached, the myRA will have to be
rolled over to a private sector Roth IRA. A rollover to the private sector allows
savers to continue to grow their savings past the maturity of their myRA
starter savings account.
Treasury says savers also can choose to roll
over their account balance into a private-sector Roth IRA at any time, and
promises to release more information about rollover to the private sector in
the future.
What's in it for an employer? Employers that
don't offer any kind of retirement plan may want to look into promoting myRAs
to employees. It's a retirement plan option that costs nothing for participating
employers, since they don't administer employee myRA accounts, contribute to
them, or match employee contributions. Each payday, a participating employer
simply facilitates a payroll deduction from the employee's paycheck to the
designated myRA account.
A separate section of Treasury's myRA website
features an employer page that carries a variety of materials that companies
can use to encourage employees' myRA participation. These include: a poster to
hang in the workplace, a double-sided brochure that can be printed or shared
electronically with employees, a web banner directing employes to
myRA.treasury.gov, for use on a company intranet site or other internal
communication channels, and FAQs that can be printed or emailed.
I hope you find this summary helpful. I look forward to hearing from you.
Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI
Amare
Berhie
(651)
621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
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