It's about to get easier for millions of California workers to save for retirement
- CalSavers, a new state-sponsored retirement savings program in California, requires employers without a company-sponsored retirement plan to offer employees a Roth IRA.
- A Roth IRA allows you to save after-tax earnings now and withdraw the money tax-free during retirement.
- CalSavers plans will roll out over the next three years, beginning in July 2019, with different deadlines for different-sized companies.
- There are similar programs in place in Connecticut, Maryland, Oregon, Illinois, and Seattle.
Saving for retirement is about to get easier for millions of Californians.
Beginning next summer, workers at any California company with more than 100 employees and no employer-sponsored retirement plan will be able to contribute part of their paycheck to an individual retirement account (IRA) through a new program called CalSavers.
The program is currently in its pilot phase and is only offering Roth IRAs, but will expand to include traditional IRAs sometime in 2019.
A Roth IRA, or individual retirement account, allows you to save some of your after-tax earnings now and withdraw the money during retirement tax free. A traditional IRA is the opposite: Anything you contribute now won't be taxed, but it will be on the backend.
Roth IRAs are often recommended by financial experts for average earners because of the tax savings: You're only taxed on your initial contributions to the account, not on the money you withdraw (which includes years of tax-free investment earnings).
In 2019, the IRS says you can contribute up to $6,000 to an IRA (that's total, for a Roth and Traditional IRA) if your adjusted gross income is less than $122,000 as a single-filer or less than $193,000 if you're married and filing taxes with your spouse. If you're 50 or older, the limit rises to $7,000.
To be clear, anyone can open and contribute to an IRA and it doesn't have to be facilitated by your employer, like a 401(k) does. But according to research from AARP Public Policy Institute, American workers are 15 times more likely to contribute to a retirement plan when it's operated by their employer in the form of an automatic payroll deduction - and some 55 million Americans don't have this option.
CalSavers is the state's solution to closing this gap. Similar mandatory IRA-enrollment programs have been enacted in Connecticut, Maryland, Illinois, Oregon, and Seattle.
By July 2019, California companies with more than 100 employees and no employer-sponsored retirement plan must be registered with CalSavers, which gives employees the option to choose their Roth IRA contribution rate, opt out of saving entirely, or do nothing and be auto-enrolled to contribute 5% of their income. There's also an option to auto-increase the savings rate by 1% each year, until it reaches 8%.
The deadlines for companies with 50 or more employees and five or more employees are July 2020 and July 2021, respectively. CalSavers estimates the program will reach more than 7 million Californians.
According to a UC Berkeley Labor Center study, the typical 25-year-old who participates in the CalSavers program will save enough to generate about $7,000 in annual retirement income. That more than likely won't cover the average person's post-retirement expenses, but it's a start.
The annual asset-based fee for Roth IRAs in the CalSavers program - which is managed by Ascensus College Savings Recordkeeping Services (ACSR) - is between 0.825% to 0.92%, depending on investment choice.
At the outset, employees can choose to invest their money in a capital preservation fund, a bond fund, a global equity fund, and a suite of target date funds. The first $1,000 in contributions for each member will be invested in a capital preservation option.