If you're new to retirement savings, the raft of abbreviations for individual retirement accounts can confuse. To know your myRA from your IRA -- or ways a Roth IRA may be better than both -- read on.
An IRA is an account set up at a financial institution, such as a bank or brokerage, for investments like stocks, mutual funds and bonds that you can draw on in retirement.
A Roth IRA can offer a significant tax advantage in retirement if you move to a higher tax bracket. Tax-free withdrawals from a Roth aren't available with a traditional IRA or an employer-sponsored 401(k) plan. IRS rules limit contributions to a Roth IRA based on income, with annual income limits for 2016 of up to $131,999 for single taxpayers or up to $193,999 for married couples who file jointly.
This Roth IRA calculator shows the potential tax savings based on factors including contribution and age. A 35-year-old married man who makes $80,000 a year and contributes the limit of $5,500 each year to a Roth until retirement at 67 can save over $518,000 (based on a 6% average annual return). The tax savings in retirement is over $130,000.
Taxes and IRA choice
If you expect that you will be in a higher tax bracket in retirement, a Roth IRA may be a stronger choice than a traditional IRA. The upside of a traditional IRA is that contributions today are tax-deductible, much like contributions to an employer-sponsored 401(k). That means you pay taxes on withdrawals from a traditional IRA in retirement.
Like a Roth IRA, contributions for traditional IRAs are limited to $5,500 a year ($6,500 if you are 50 or older). If you can't decide between the two, you don't have to: If you qualify, you can contribute to both kinds of IRAs, however, total contributions to both accounts can't exceed the limits. For example, if you're younger than 50 and contribute $3,000 to a Roth IRA, you could add $2,500 to a traditional IRA.
MyRA is the new kid on the block. This option, established by President Barack Obama via the U.S. Treasury Department in 2015, is designed as a starter account for people without access to a retirement savings plan at work.
MyRA follows the same rules as a Roth IRA: Contributions are made with after-tax dollars, and withdrawals from the account are tax-free in retirement. Like a Roth IRA, contributions can be withdrawn at any time without tax or penalty, but any interest withdrawn before age 59½ may be subject to taxes and a penalty, except in certain exceptions, like for a house down payment. (With a traditional IRA, unqualified withdrawals taken before age 59½ will be taxed and penalized 10%.)
A myRA requires no minimum contribution to open an account, and your money is invested immediately. With a Roth or traditional IRA, you may run up against a minimum investment requirement on some products such as mutual funds. Your choice of investments with myRA, however, are limited to U.S. government bonds; there are no fees and your principal is guaranteed, but the return will likely be less than with other investment vehicles. Roth IRAs, on the other hand, give you a wide-ranging choice of investment vehicles.
If you can't make the minimum deposit for a Roth IRA, or value safety over high returns, myRA may be the right choice for you.