States push to expand retirement savings as congressional bills die

For workers who end up in one of these auto-enrolled accounts, it’s important to understand how they differ from a 401(k) plan.

For starters, money deducted from your paycheck — assuming you don’t opt out — goes into a Roth individual retirement account that is managed by an investment company, not your state government. Roth contributions are not tax-deductible as they are with 401(k) plans. (At some point down the road, the programs also might offer traditional IRAs, depending on the state.)

Yearly Roth IRA contribution limits also lower. You can contribute $5,500 in 2018 ($6,000 in 2019), although higher earners are limited in what they can contribute, if at all. Also, anyone age 50 or older allowed an additional $1,000 contribution.

In comparison, with 401(k) plans, the contribution limit is $18,500 in 2018 and $19,000 next year, with the 50-and-over crowd allowed an extra $6,000. Income limits also apply if you’re considered a highly compensated employee.

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Meanwhile, Roth IRAs — unlike, in general, 401(k) plans — also come with no penalty if you withdraw your contributions before age 59½.

This means that if a worker wants to take back any contributions before retirement, there is no penalty because they already paid taxes on it. (For earnings, however, there could be a tax and/or penalty.) In other words, it could become an emergency fund more easily instead of being exclusively for retirement.

“If the goal is to improve the headcount — the number of people covered by a workplace plan — then these state programs will do a great job,” said Jack Vanderhei, research director for the Employee Benefit Research Institute. “The problem is that just because you have someone in a plan, it doesn’t mean they’ll have enough for retirement.”

Additionally, they won’t come with the incentive of an employer match on work contributions, as 401(k) plans often do.

“Sometimes workers put in contributions because they know they’ll get free money,” Vanderhei said. “We’ve seen participation rates be lower, or lower contributions, when there is no employer match.”

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