Automation is the cure for a number of life’s roadblocks — forgetfulness, procrastination, a shortage of willpower, an overwhelming to-do list. One example: Instead of manually moving cash into a retirement savings account every month, you set up an automatic transfer once and let the system take over.
That’s the idea behind the “auto-IRA,” a program bandied about for years on both the state and national level that aims to make it effortless for workers to save for retirement and take advantage of all of the benefits that individual retirement accounts offer, such as tax breaks on income and investment growth.
The emergence of the auto-IRA is good news for people in the states starting the programs. And if yours isn’t one of them? That’s OK: Virtually anyone can create their own auto-IRA, and it doesn’t require much work.
How auto-IRAs work
Auto-IRAs are designed to help employees who work at companies that don’t offer a traditional workplace retirement savings plan, such as a 401(k) or pension. That’s roughly one-third of private-sector workers, according to research from the Pew Charitable Trusts.
“Auto-IRAs ease common blockers to opening an investment account on your own: paperwork and inertia.”
In addition to addressing the lack of access to workplace plans, auto-IRAs are designed to help workers overcome two of the common blockers to opening an investment account: paperwork and inertia.
A handful of states, including Oregon, California, Illinois, Connecticut and Maryland have or are planning to launch auto-IRA programs in which eligible employees are automatically enrolled in an IRA-based savings plan via automatic payroll deduction. The investment account is managed by a third-party financial services provider, and workers can opt out of the program at any time.
The first state-sponsored auto-IRA pilot program, OregonSaves, was launched in 2017. According to the Center for Retirement Research at Boston College, as of December 2018, 62% of the roughly 40,000 eligible workers had continued to contribute to the account, the majority at the 5% of gross salary automatic default rate. (Future contribution increases are also automated at a rate of 1% a year until a worker is saving 10%. Participants can adjust how much they save or opt out of the program at any time.)
But again: You don’t need to wait for your state or the federal government to require your workplace to help you save for retirement. In fact, you may be better off setting up your own auto-IRA.
Starting your own auto-IRA
If you have earned income, you’re eligible to contribute to an IRA. Setting it up on your own gives you the freedom to choose what type of IRA is best for your situation and pick your own provider.
This may sound daunting, but it’s not much more complicated than opening an online bank account.
“Once you’ve set up the account you can add the 'auto funding' functionality to your IRA.”
You can narrow the field of providers depending on how much help you want managing your retirement investments. The paperwork part is easy. For a detailed walk-through of what it takes, see how and where to open an IRA.
Once you’ve set up the account, you can add the “auto funding” functionality to your IRA. Most providers make it easy to set up scheduled contributions. You’ll be asked for account information on the source account (likely your checking account) and how frequently the transfers should take place.
Just remember the annual contribution limits set by the IRS: $6,000 in 2019 for younger savers, and $7,000 for those 50 and older. To contribute the full amount as a younger saver, you would set up an automated transfer of $500 per month. Please note, however, that Roth IRAs come with additional contribution limits based on your income.
There is no requirement to fund an IRA to the max, no matter who helped you set up the account. But in the future, you’ll be extremely grateful if you can swing those contributions today.
If that’s not possible now, here’s another idea to steal from the architects of the auto-IRA: Vow to increase your deferral rate 1-3% every year until you’re saving at least 10% of your income. A quick run-through on a simple retirement income calculator will show you how even small savings increases pay off big-time down the road.