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Tue February 4, 2014
MyRA and IRA: Understanding Options For Your Retirement Savings
MICHEL MARTIN, HOST:
I'm Michel Martin and this is TELL ME MORE from NPR News. Now it's time for matters of personal finance. It's been a week since President Obama's State of the Union address. And you might remember him talking about the country's retirement crisis and his plan for something called up MyRAs to help people jumpstart their savings, especially if they don't work for a company with a retirement account.
And we heard a little bit about that yesterday, but we wanted to extend the conversation to include information about some investment vehicles that are already out there or IRAs or Individual Retirement Accounts. We're joined now by one of our money coaches, Louis Barajas, to tell us more about how IRAs work and why you might want to consider one of them. So, Louis Barajas, welcome back. Thanks so much for joining us.
LOUIS BARAJAS: Thank you, Michel.
MARTIN: So what is an IRA, an Individual Retirement Account, and is that the same as a 401(k) or a 403(b), which is something that people may have through the company they work for?
BARAJAS: Well, technically, no. Usually what happens it's when people leave a job, they have to transfer their money over. They can transfer it to their new employer. They can transfer it to an IRA. And then it's their own individual retirement account. They also can start if they're self-employed or don't have actually also a retirement plan through work, they can start their own individual retirement account. And so that's what an IRA is. Now the problem, there's a big confusion when it comes to IRAs as to how they invest the money.
MARTIN: Oh, well, tell us about that. What is the difference? How do they invest that money?
BARAJAS: OK, well - well, usually what will happen is when you ask someone, you say, do you have an IRA, is, yes, I do. And they say, well, what do you have your money invested in? And they say, well, I have it in an IRA. Well, I go, well, that doesn't make sense. I said an IRA's just kind of like a depository. It's like a trashcan. And you have to...
MARTIN: Well, maybe bucket would be better.
BARAJAS: ...Select investments. OK. Well, it's a bucket. And it's a bucket - the thing is that you can select pretty much any kind of investment if you go with one of the brokers out there. It doesn't matter who it is whether Charles Schwab or Merrill Lynch. There's thousands of investments and that's the problem. The problem is most people are afraid to select investments because they don't have any investment education.
MARTIN: That was one of the things I was going to ask you. You know, we've talked a lot about why this retirement crisis exists. Pretty much, I think most people - most analysts agree that there is a problem with people are just not saving enough for retirement. And we've talked a lot about what the reasons for that are. But why aren't people - more people investing in IRAs that - is it they don't have the money? Is it that the level of contribution you need to start is too high for a lot of people? Or you think people are just confused?
BARAJAS: No, I think it's all of those. I think what happens is that you usually, to start an IRA, you'll need a minimum of about $1,000. And so what happens, the new MyRA comes in and the minimum is $25, right. Then you can continue adding with $5 every paycheck. So there's an obstacle there. There's a barrier there. The other thing is now all...
MARTIN: So what then - so just to clarify this. So the - so what the MyRA, the president's idea, adds to the marketplace is that you can get started with a lot less money than you can with some of the other funds that are already out there. That's the chief benefit of it?
BARAJAS: Well, that's one of the benefits. And the second benefit is they've taken the decision-making out of the investing. And it's basically just going to be a bond. And the government's going to manage this money for you, just like they've been doing for Social Security. So all of a sudden, the fear of volatility, the fear of oh, my God, I don't know what investments to select, that's going to be gone. So this is a great - it's a - the MyRA is a starter IRA for lower-income Americans who don't have a lot of assets and who are afraid and don't have maybe the investment education. So those are the two major benefits of the MyRA.
MARTIN: Is there any downside that you can think of?
BARAJAS: You know, there are downsides. I thought about this extensively. And so the problem is the MyRA's only going to have a $15,000 limit. And so it's really acting like a Roth IRA. And so at some point, you're going to have to transfer the $15,000, once you get there, to your own Roth IRA. And so here we go again - what do I select, which investments do I select? I don't know. And so $15,000 is not a lot of money, but you still now are on your own again. So it's lacking education. The other one that I see, and I thought about that, is that MyRA does not have any penalties. So usually, if you have an IRA or a 403(b) or a 401(k), you have to leave that money in it until you're 59 1/2 otherwise you'll have a 10 percent penalty.
MARTIN: Unless there's some - unless you've got something dramatic, right?
MARTIN: I mean, if you're - if you have, like, a major health crisis or something of that sort.
BARAJAS: Absolutely. But the problem is that that 10 percent, you know, still going to have to pay taxes on it and the 10 percent penalty. But that's enough sometimes to say, you know, I don't know if I want to take the money out of the IRA because I'm going to have to pay so much on it. The MyRA does not have any penalties. So I'm afraid that instead of really people focusing on creating a retirement vehicle, something that they can transfer into a Roth IRA and add going forward, they're going to use it as a savings vehicle, like an emergency reserve. And that's not what MyRAs are for. They're really - you know, we should - we need to treat this money like sacred money for retirement.
MARTIN: Well, now you've mentioned Roth IRA several times. Can you talk a little bit about that. What's the difference between a Roth IRA and a different kind of IRA...
MARTIN: ...And why would you consider one versus the other?
BARAJAS: You know, that's a wonderful question there because people are really confused about that. An IRA is tax-deductible. For probably 99 percent of most people, they can write it off on their tax return. They don't have to pay - it's pretax. The dollars grow tax-deferred. And at some point when you retire, you'll start paying taxes on the growth. So - and on all the money, actually. A Roth IRA is after-tax money.
So I've already put money away after I've been taxed on this money, and it grows tax-deferred. And when I pull the money out when I retire, it's tax-free. So it's really a great idea for a lot of people who are low-income Americans who are maybe never going to be in a high-tax bracket and don't need the tax deductions now. And that's for mostly half of Americans. So Roth IRAs are wonderful for young people, someone who's not in a high-tax bracket, you know, and they're going to pull the money out tax free when they retire.
MARTIN: And again, could you talk a little bit more about just the work that you do. I mean, you work directly with people from all different backgrounds. The main reason that people tell you that they're not saving now is what? Is it that they feel that they have to spend all their money on their day-to-day expenses? Or they just feel - what - that they feel that - they just feel like they're going to make a mistake? Or are they worried about losing their money in the stock market or something of that sort?
BARAJAS: All of the - you know...
MARTIN: All of the above.
BARAJAS: It's all of those. Yeah. And you know what? It's almost like paralysis of analysis when they start thinking about that. And then all of a sudden they hear that there's a 300 point drop in the stock market. And they think that they're putting their money in stocks instead of, you know, diversified mutual fund of stocks and bonds. And so there's a lack of education. And they don't understand what volatility is versus risk because there's also risk, for example, in the MyRAs, even though they say there's no volatility. You're money's not going to go down. You're not going to lose your money. But if they money's earning, you know, 1.4 or 1.5 percent and inflation's at 1.9 percent, we're still - you're still losing money on that investment. So it's just lack of education. The other thing is everybody's spending every dime that they get, you know.
And honestly, I do. I work with really poor people trying to help them out and get them started on a budget and putting some money away. But I also work with really wealthy people. And everybody, doesn't matter what level, are spending everything that's coming in, in fact, if not more. And so they've lost sight of the future of what's going to happen because Social Security's not really going to be sufficient for retirement. And so what I'm always working for is trying to create financial dignity in people's lives.
MARTIN: So give us a final thought here, Louis. What's your word of wisdom here? If people take nothing else away from this conversation, what would you want them to think about?
BARAJAS: I need people to understand that wealth is really a habit. And this MyRA is going to remove the excuse of people putting money away. They're not going to say, I don't have enough to get started. They do. Everybody can find $25. Everybody can add $5. But what the beauty of this is, you're going to create a wealth habit of saving money. And once you do that, it becomes a lot easier because there's momentum. There's not this inertia where you just don't do anything. And it'll get people investing. So just get started. That's the beauty of everything.
MARTIN: Louis Barajas is a personal finance expert and author. He's the author of "The Latino Journey to Financial Greatness," among a number of other books. And he was kind enough to join us from Irvine, California. Louis, thanks so much for joining us once again.
BARAJAS: Oh, and thank you, Michel. Transcript provided by NPR, Copyright NPR.