Auto-IRAs: A Smart Boost to Your Retirement Strategy

An auto-IRA may be just what your retirement portfolio needs if you qualify. With the decline of defined benefit pension plans in recent decades, retirement savers must take an active role to ensure their financial security later in life, likely with Individual Retirement Accounts (IRAs). Social Security alone is unlikely to fill that need with an average benefit of just over $1,900 per month, so workers need to save throughout their careers.

Workplace retirement savings programs like 401(k)s and 403(b)s provide an excellent way to set aside money for retirement, offering tax benefits and, in many cases, matching employer contributions. Americans are roughly 15 times more likely to save for retirement when their workplace offers a plan and 20 times more likely to save if contributions are automatic, according to an AARP study.

However, almost half of all U.S. workers lack access to workplace retirement plans. Even among those that have access, many never enroll. That leaves many workers without adequate retirement savings. Auto-IRAs are one possible solution to this problem.

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What are auto-IRAs?

Auto-IRAs are not a new type of IRA per se. Instead, they are traditional IRAs and Roth IRAs offered through state automatic enrollment programs. In states that have them, these programs require certain employers who do not offer a retirement plan to enroll eligible employees into a state-run automatic IRA.

Employers open auto-IRAs for eligible workers, and each employee's account is funded through payroll deductions. This makes it easier for workers to contribute since they don’t have to spend time transferring money to an IRA each pay period. Most plans' default contributions are between 3% and 5% of the employee’s salary. Participants may increase or decrease their contribution percentage or opt out of the plan altogether.

Which states offer auto-IRAs?

To enroll in an automatic IRA, you first need to live in a state that is currently operating an active Auto-IRA program. As of today, this includes eleven states:

• California
• Connecticut
• Colorado
• Deleware
• Illinois
• Maine
• Maryland
• New Jersey
• Oregon
• Virginia
• Washington  (enacted but does not become active until 2027) 

Several other states, including Hawaii, Minnesota, Missouri, Nevada, New York, Rhode Island, and Vermont, are in the process of adding an auto-IRA program. Others have some form of pilot program or related effort, including the Massachusetts CORE Plan for non-profits, the New Mexico Work and Save program and others. 

Employers in these states must automatically enroll you into the auto-ira unless they already have another retirement program in place. Employers may also be exempt if have very few employees (generally under 5 to 10), have been in business less than two years or meet other exemptions. 

How do auto-IRAs work?

As the name suggests, auto-IRAs work just like any other IRA — but the program automates many steps, such as initiating enrollment and funding the account. Employees must still fill out their personal account information after their employer enrolls them in the program. As with other IRAs, contribution limits and Roth IRA income limits apply. 

Your state wants you to save for retirement, and it knows that residents are more likely to benefit from an auto-IRA program if the process is easy and many of the decisions are pre-set. That's why the state board has already selected some options for you, such as which investments to pick or how much to contribute from your salary. Participants can override these decisions and make their own investment selections or contribute a different amount. These defaults may prevent some participants who would not make their choices from missing out on the many benefits of saving, such as compound investment growth.

Should you sign up for an auto-IRA?

As with any retirement vehicle, there are pros and cons to signing up for an auto-IRA. However, it’s important to remember that automatic IRA programs are not intended to compete with or take the place of other savings plans that may provide better benefits. The hope is that they fill a gap for employees not otherwise covered by a workplace plan.

Some of the advantages of auto-IRA programs are as follows:

• Access to a retirement savings program. You get access to an employer-sponsored plan with potential tax benefits.
• Automation. Automatic enrollment makes it easier to participate and could boost worker savings.
• Building an emergency fund. Workers enrolled in automatic Roth IRAs may access these funds in an emergency.
• Cost. Auto-IRAs often have lower fees than privately-run employer retirement plans and are typically easier and less expensive for small businesses to administer.
• Ease of use. Your auto-IRA will be funded through payroll deduction, simplifying the contribution process.

Here are some of the disadvantages of auto-IRAs.

• Geographic limits to access. Auto-IRAs are not available in all states. Regardless of where you live, you may find that a SEP IRA or solo 401(k) is available to you and a better option than an auto-IRA.
• Contribution limits are lower. Compared to standard 401(k) contribution limits, auto-IRAs (like all other IRAs) won't let you save as much money. The annual limit is just $7,000 in 2024 and 2025. That's significantly less than employer-sponsored plans such as 401ks and 403bs, which allow employees to set aside up to $23,000 in 2024 and $23,500 in 2025. Remember that older workers may also qualify for catch-up contributions, allowing them to save more.
• No match. Employers cannot provide matching contributions.
• Less flexible. Auto-IRAs often provide less flexibility than IRAs that individuals open on their own.
• Customer ID issues. Some workers have had trouble signing up due to problems with verifying their identity.

A national auto-IRA program

Auto-IRAs are currently a matter of state legislation. However, the Automatic IRA Act of 2024, which was introduced in the House of Representatives in February, would create a national auto-IRA. If it passes, the law will make automatic IRAs available nationwide beginning in 2027. However, previous attempts to pass national auto-IRA legislation have failed to gather enough support and some experts predict that the Trump administration will not support it.

Don't confuse this legislation with recently passed auto-401(k) enrollment. The SECURE 2.0 Act requires most employers to offer automatic enrollment in 401(k) plans starting in 2025. While auto-401(k) enrollment should help increase the number of people saving for retirement, it won't address the lack of employer-sponsored retirement plans in the way a national auto-IRA program could.

Read More

• New Rules for Retirement Savings Taking Effect in 2025
• Is Now a Good Time to Open a Roth IRA?
• What Is an IRA and Which Type Is Best for You?
• How to Convert a Traditional IRA to a Roth After 60