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State Auto-IRA Programs: Access Roth IRA Benefits and Automatic Payroll Deduction Through Your State

Written by Tessa Campbell; edited by Sarah Silbert

2024-03-14T22:54:38Z

older couple laughing and running on beach while holding hands — State auto-IRAs help close the retirement savings gap in the US. Here's how.

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State-run auto-IRAs offer qualifying individuals automatic enrollment in a state-administered Roth IRA to encourage retirement savings.
Oregon was the first state to launch an auto-IRA program in 2017; a handful more states have followed since.
Auto-IRAs offer employees easy access to a retirement account with payroll deductions.

Millions of Americans lack access to employer-sponsored retirement plans, like 401(k)s and pensions. This makes it significantly harder for people to save for retirement adequately.

Auto-IRAs can help close this gap by targeting private-sector employers and small businesses that don't already offer qualifying retirement saving accounts. By automatically enrolling employees, auto-IRAs address the inertia preventing people from saving for retirement on their own.

Here's how state-run auto-IRAs work and how to invest in these programs.

What are state auto-IRAs?

State auto IRAs are state-sponsored retirement savings vehicles that offer automatic enrollment for employees currently lacking access to an employer-sponsored 401(k) or pension. These programs automatically deduct a percentage of an employee's earnings (usually between 3% and 5%) toward their nest egg while also providing tax advantages and compounding power.

State IRAs help small-business employees access retirement benefits. They also relieve individuals of the responsibility of finding an IRA provider, setting up regular contributions, and managing assets. AARP found that workers are 15 times more likely to save when accessing a workplace retirement plan and 20 times more likely to save when automatically enrolled.

"It all boils down to inertia and simplicity. If you're automatically enrolled, you don't have to fill out pages of documents to open up an account at a bank or brokerage firm, " says Chad Harmer, senior financial planner and managing director at Harmer Wealth Management. "It's all done directly through your employer. It simplifies the whole process and that's why there's been such a great success for state-run programs so far."

Why states are offering automated retirement programs

The retirement gap is a growing concern in the US. In 2022, only 46% of households reported having retirement savings. This gap disproportionately affects low-income workers, people of color, women, younger workers, and those in the private sector and small businesses.

Data from Pew Charitable Trusts reveals the stark disparity: Just 13% of low-income households have retirement, compared to a 90% of high-income households. If left untreated, the US retirement savings gap could result in a $1.3 trillion burden by 2024, with 61% of retirees having an annual income of $75,000 or less. Over the next 20 years, the states face an estimated $334.3 billion shortfall due to inadequate retirement savings.

To address this issue, some states like Oregon and California created state-run auto-IRA programs that encourage more individuals to save.

State-administered IRAs are particularly effective at reaching demographics typically excluded from employer-sponsored plans. Illinois' program, for example, found a majority of participants to be younger, unmarried women, with 39% being people of color and high-school graduates.

Auto-IRAs provide private-sector workers with easy access to long-term savings and help small businesses recruit and retain employees seeking workplace retirement benefits. The other advantage auto-IRAs offer is convenience. Automatic enrollment in state-run retirement programs helps set up workers without the time and effort to open a retirement account.

According to Pew, state auto-IRAs accumulated over $1 billion in total assets across seven state programs with more than 800,000 workers participants.

How do state-auto IRAs work?

States administer these auto-IRA programs with oversight from each state's retirement board. The retirement board decides on the IRA contractor, the requirements of the retirement program (including employee eligibility and possible exceptions), and the kinds of investment funds.

Common investment choices include target-date funds and bonds. In addition, some plans may automatically increase the employee's contribution percentage each year.

States that have implemented auto-IRAs require certain private and small business employers (such as employers with a minimum of 5 or 10 employees) that don't offer a qualifying retirement savings plan to participate in these programs. Once employees are enrolled, they automatically start contributing through payroll deductions like a 401(k). However, employers are unable to offer matching contribution benefits with an auto-IRA.

Auto-IRAs default as Roth IRAs, so participants contribute after-tax income for tax-free growth and withdrawals. Some auto-IRA programs offer a traditional IRA option for employees who prefer to contribute pre-tax dollars or have an income greater than $161,000.

The same annual IRA contribution limits and withdrawal rules also apply to auto-IRAs. If you're under age 50, you can contribute up to $7,000 to an IRA in 2024 (up to $8,000 if you're 50 or older). You become eligible for withdrawal at age 59 1/2 and must start withdrawing by age 73.

How to invest in state-run auto-IRAs

First off, does your state offer a state-administered auto-IRA program? If you're not residing in a state that offers one of these programs, you won't be able to participate. In that case, you can check and see if your state plans to offer an auto-IRA program in the near future. If not, you can open one of the best IRA accounts online.

For states that offer an automatic IRA program, you should have already received an invitation via email or postal informing you that your employer joined the state auto-IRA program. You'll receive an access code or invite to open an account. You can also choose to opt out of the plan.

Self-employed individuals can also open an auto-IRA plan as long as they still meet the state's eligibility requirements. To sign up, you must provide personal identification (passport, driver's license, etc.), contact information, and bank information.

Remember, state-run IRAs are only available to employees without access to a 401(k) or other qualifying workplace retirement plan. So, if your company does offer a retirement plan, you're likely not eligible to participate in a state IRA.

States offering auto-IRA programs

Oregon was the first state to implement an auto-IRA called OregonSaves in 2017, with Illinois (Illinois Secure Choice) and California (CalSavers) following soon after.

Additional states that offer state-run auto-IRAs include:

Colorado (Colorado SecureSavings)
Connecticut (MyCTSavings)
Maine (MERIT)
Maryland (MarylandSaves)
New Jersey (RetireReady NJ)
Virginia (RetirePath Virginia)

Seattle and New York City also offer an auto-IRA program to boost retirement savings among private sector and small-business employees.

More states are continuing to jump on the auto-IRA bandwagon. For example, on May 24, 2023, Pennsylvania's House of Representatives passed a bill to create its own state-run automatic IRA called the Keystone Saves Program for companies with five employees or more. The program plans to be implemented within 24 months from the effective bill date.

Pros and cons of state auto-IRAs

Pros	Cons
Increased accessibility to retirement plans for employees without access to employer-sponsored 401(k)s Automatic enrollment Automatic payroll deductions Professionals fully manage investments Low-cost for employees and employers	Only a few states offer auto-IRAs Limited investment options and a lack of flexibility over account Other brokerage-offered IRAs may provide lower fees, more investment options, and better benefits IRA contribution limits are lower than 401(k) plan limits Employers can't offer matching contributions Not available to gig workers

While state auto-IRAs open the door for more people to start saving for retirement, you won't get the same flexibility or benefits that you would through some investment platforms or online brokerage accounts.

"A potential drawback is the mandatory participation may not suit all employees and employers," says Harmer, the financial planner. "Another issue could be that the default savings rates or investment choices offered by auto-IRAs may not align with an individual's goals or risk tolerances. Ideally, these issues can be ironed out, but it could potentially burden very small employers who aren't equ ipt to manage the logistics of auto-enrollment."

Many of the best online brokerages that offer retirement plan options also provide financial planning resources, customized investment portfolios, automated portfolio rebalancing, tax-loss harvesting, educational resources, and much more.

Robinhood Investing and SoFi Invest, for example, both offer IRA match contributions. So, while investing in a state-run auto-IRA is a great way to get your foot in the door, consider all your options before opening an account.

Another issue is that auto-IRAs are unavailable to gig workers, such as independent contractors or freelancers.

"Many people have side hustles and gigs that generate additional income or become their full-time position," says Harmer. "It should come with some type of retirement program."

While state-run IRAs aren't available to gig workers, a nationwide auto-IRA might. This is one of the main goals the Automatic IRA Act of 2024.

FAQs

Should you invest in a state auto-IRA?

State auto-IRAs are helping elevate the retirement gap left by workplace 401(k) and pension plans. State retirement plans, usually Roth IRAs, offer automatic enrollment to help encourage saving without the hassle of finding and signing up with a third-party brokerage or bank.

You should open an auto-IRA if you currently live in one of the few states that auto-IRA programs and cannot access a 401(k) or pension plan through your workplace. IRAs through an online brokerage or bank offer flexibility and more investment options, but the convenience of automatic enrollment and payroll deductions are hard to pass up.

As more states pursue implementing auto-IRAs, there's a push to equip federal auto-IRAs. "Legalizations like the Automatic IRA Act of 2024 are looking at expanding to the national level to extend the benefits we've observed in the state programs," states Harmer. "It wouldn't be a replacement, but rather a complement."

Tessa Campbell

Junior Investing Reporter

Tessa Campbell is a Junior Investing Reporter for Personal Finance Insider. She reports on investing-related topics like cryptocurrency, the stock market, and retirement savings accounts. She originally joined the PFI team as a Personal Finance Reviews Fellow in 2022. Her love of books, research, crochet, and coffee enriches her day-to-day life.

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Understanding State Auto-IRAs: What They Are and How They Work - Business Insider