IRA Financial’s Adam Bergman discusses the pros and cons of state run IRA plans. He talks about the impact these programs could have on small business owners.
The one thing about retirement planning is that it is a choice. You must choose to put money aside today to save for tomorrow. Financial savvy people know this already. However, many Americans fail to understand the importance of saving. Retirement may be decades away, so why do you need to start saving now. Under President Obama, the MyRA program was started. This allowed many low- and middle-class Americans to start saving for retirement. However, the program was phased out under the current president. Americans, especially those barely squeaking by, still need help saving for retirement. This is where the state IRA may come in.
Why State Run IRA?
The whole premise behind the MyRA program was that many people do not have a 401(k) available to them. The government wanted to make retirement savings available to every American. But, the onus was on the business owner, to set up the plan. The program had plenty of faults for sure, but the idea was sound. If you work for a job, where the employer couldn’t afford to offer a 401(k) plan, you have options. In addition, plans were made to be automatically funded. You didn’t have to opt in. In fact, you had to opt out! Contributions were set to a low percentage, but it was something. If you didn’t opt out of contributing, but the amount was so small, you didn’t really miss it on your paycheck.
A State IRA is being looked at more seriously now. In fact, states such as Oregon, California and Colorado, have implemented a state IRA or are thinking about it. Auto-enrolling has seen great results. According to a Vanguard study, about 93% stayed with the retirement plan. Of course, it’s imperative for everyone to save for retirement. If the government wants to help, especially by incentivizing savings, it’s a good thing.
Another great thing about an IRA is that it is portable. A 401(k) plan is tied to your job. You can’t move the funds or change plans unless you separate from the job. An IRA is not tied to a job. If you want to move it to another custodian or convert the funds to a different plan, you can. Also, there are talks about tax credits. More incentives for employees to save and employers to offer a plan.
The biggest drawback to any IRA, even a state IRA, are the contribution limits. A 401(k) offers you the chance to contribute three times as much as an IRA. In 2020, you can contribute up to $6,000 to an IRA, plus another $1,000 if you are at least age 50. Alternatively, a 401(k) allows for contributions up to $19,500, or $27,000 if age 50+.
There are costs for setting up a plan. The government may help offset the cost, but that’s about it. The plan needs to be administered, and fees associated with that are ongoing.
Investment options are quite limited when looking at a state IRA. Going out on your own can broaden your opportunities. Either way, it’s important to save. That’s a given, no matter how you go about it. It’s important to see past the drawbacks and focus on the positives.
Whether a state IRA is coming to where you live or not, it’s important to be proactive about saving for retirement. Of course, there are other, better, options out there. But some people may not have a choice. It’s up to the government to help new savers out. Further, if they incentivize small businesses to open up plans, it will only be a positive. Everyone should be able to take advantage of the retirement system. Afterall, as Mr. Bergman says, it’s the one government program that works!
Listen to the podcast for a lot more of Adam’s thoughts. Of course, you can always check out our SoundCloud page for all of our podcasts. Afterall, what else do you have to do nowadays?!