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Whether you get a retirement plan through work depends more, at least in part, on where you live.
In the last decade, 16 state legislatures have adopted retirement savings programs aimed at workers whose employers do not offer 401(k) plans or similar options. Some programs are up and running, while others are in the planning stages.
Some are also voluntary for companies to participate. But most companies require companies to offer their own 401(k) or make it easier for their employees to automatically enroll — who can choose — into individual retirement accounts through a program called auto. -State IRA.
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“On average, we’ve seen one or two state programs released each year and we expect that trend to continue through 2023,” said Angela Antonelli, executive director of the Center for Retirement Initiatives. Georgetown University.
“We should see program assets soon exceed $1 billion, and more than 1 million saver accounts by 2023, and then grow faster as other states open,” he said. Antonelli.
Here’s what’s in the pipeline
Last year, Maryland and Connecticut launched auto-IRA programs, joining Oregon, California and Illinois. Colorado and Virginia are expected to do so this year. Others – including Delaware, New Jersey and New York – are still in the planning stages.
In all, 46 states have taken action since 2012 to implement a program for unmasked workers, consider legislation to establish one or study their options, according to the Antonelli organization.
Although there are some differences in the programs, they usually involve enrolling employees in a Roth IRA through a payroll deduction starting at 3% or 5%, unless the employee chooses (about 28% to 30% do so, according to Antonelli). There are no user fees, and the account is managed by an investment firm.
Contributions to a Roth account are not tax deductible, as they are with a 401(k) plan or similar option. Traditional IRAs, where contributions may be tax-deductible, are an alternative in some states, depending on the details of the program.
In the current auto-IRA programs, employees have accumulated more than $630 million in 610,000 accounts of 138,000 employers, the center said.
About 57 million people do not have a workplace plan
Of course, there is still a long way to go to reach all of the estimated 57 million workers who do not have an employer-based retirement account.
While you can set up an IRA outside of work, people are 15 times more likely to save if they can do so in a workplace plan, according to AARP.
Large companies may offer 401(k) plans. Of employers with 500 or more employees, 90% offer a plan, according to the US Bureau of Labor Statistics. This compares to 56% of companies with fewer than 100 employees.
The auto-IRA program addresses that disparity: All but the smallest businesses—say, with fewer than 10 employees or those that don’t use an automatic payment system—face the responsibility of taking share or present their own plans.
Some companies choose 401(k) over government programs
It seems that some companies are choosing 401(k) instead: In the year after the first three IRA programs started – Oregon (2017), Illinois (2018) and California (2019) – there was a 35% growth rate. higher. among the new 401(k) plans in private companies in these states versus other states, according to recent research from the Pew Charitable Trusts.
“We’ve seen an increase in new 401(k) plans in states that have adopted auto-IRAs,” said John Scott, director of the Pew Retirement Savings Project. “Many employers say they prefer to have a 401(k), so in many ways I think the state program is pushing employers to offer 401(k) plans.”
Federal law encourages companies to offer 401(k)s
The changes at the federal level, enacted as part of the Secure Act of 2019, are intended to help small businesses offer 401(k) plans. Instead of sponsoring their own plan and taking on administrative and fiduciary responsibilities with it, they can join what is called an employer plan with another company – a type of shared 401(k).
The law known as Secure 2.0, which was published last month, includes measures to further improve the appeal of integrated plans.
“The idea is to try to fill the [access] as empty as possible,” Scott said.
While Congress has so far been reluctant to require companies to offer a 401(k), lawmakers have introduced a mandate in Secure 2.0: 401(k) plans that employees must sign up for. However, it does not include existing plans, companies with 10 or fewer employees and companies less than three years old.
Restrictions on government programs
Government programs have limitations. For example, they do not provide matching contributions to 401(k) plans.
Contribution limits are also lower than 401(k) plans. You can put up to $6,500 into a Roth IRA in 2023, although higher earnings are limited in what they can contribute, if at all. Also, anyone 50 years of age or older is eligible to participate in an additional $1,000 “allowance”.
For the 401(k) plan, the contribution limit is $22,500 in 2023, and people 50 and older are allowed an additional $7,500.
However, Roth IRAs — unlike traditional IRAs or 401(k) plans — are also penalty-free if you withdraw your contributions before age 59½. However, early withdrawals may incur taxes and/or penalties.
The program is also partly out of necessity. Instead, the government has recognized that doing nothing means risking increased pressure on state-funded social services for financially disadvantaged retirees. ball.
“The state has led the way in starting to close the access gap,” Antonelli said. “The cost of doing nothing is too high, with billions of dollars in estimated budget and financial implications for many states over the next 20 years due to aging residents who will have nothing to save for retirement.”