California’s CalSavers is a Model Roth IRA Retirement Savings Program
By staff columnist, Alexandra Deluise
One of the most emphasized pieces of wealth-building includes maxing out any and all workplace retirement accounts. In fact, this is one of the common suggestions for people looking to become millionaires. Calsavers can help!
Automated investing can make or break your retirement success. Taking advantage of tax-deferred retirement accounts, such as an IRA or 401(k), is another way that employees can ensure that they are making the best use of their earnings.
While this is solid advice, it overlooks one key detail: not everyone has access to a retirement account through their employer!
In fact, it’s estimated that 35% of employees do not have access to a workplace retirement fund. That’s a lot of people who don’t even have the option to save through an employer-sponsored retirement plan. Since people are typically more likely to meet their savings goals when they can do so automatically, this lack of access is a major disservice to millions of people.
Small Business Majority, a network of small business owners, might have a solution to this problem for small businesses in California, a new program called Calsavers.
CalSavers – An Automated IRA Program for Small Businesses
In 2019, CalSavers will be rolling out to small businesses, although there is a pilot program available in Fall, 2018.
CalSavers offers small businesses and self-employed workers a chance to save for retirement automatically. The program is specifically designed to be affordable despite the lack of resources some small businesses have, which in turn helps these businesses attract (and keep!) employees.
CalSavers is available at no added cost to small businesses.
For employees, CalSavers offers a chance to save for retirement that would otherwise be out of reach: they get all the benefits of a Roth IRA, with the option to contribute directly from their paychecks.
Actually, the CalSavers retirement program is a Roth IRA and governed by the Roth IRA tax rules. That means you can contribute up to $5,500 or $6,500 if you’re over age 50, in 2018 and up to $6,000 or $7,000, if you’re over age 50, in 2019. Eligibility to contribute is phased out after your income reaches $120,000 for single taxpayers and $189,000 for married taxpayers.
Contributions are optional, of course, so employees will need to choose to take advantage of the program in order to reap the benefits. However, research has demonstrated time and again that those who are able to save automatically tend to save more money than people who don’t automate their retirement savings.
Right now CalSavers is only available in California, but the model is impressive. It could certainly be worthwhile for other states to watch as CalSavers is implemented fully in 2019.
Even if your employer doesn’t offer a retirement plan, you should contribute to a Roth IRA on your own! It’s easy to set up, and will help secure your financial future.
Why are Automated Savings Good?
Automating your savings goals is helpful because it can keep your money organized. If a set portion of your income automatically goes into your retirement fund, you know exactly where it is.
But even if you don’t have a workplace retirement program – yet, consider automating your own savings into a Roth IRA account.
Money that automatically goes into a relatively inaccessible account is money that you can’t accidentally spend on other things. This is a major benefit for individuals who want to meet massive savings goals.
If your money is in your wallet or checking account, it’s very easy to accidentally spend money even with the strongest willpower.
If your money is going into a retirement IRA or 401(k) account you won’t be able to touch it without a penalty, which adds to the incentive to keep saving. While the money can be accessed in an emergency, penalty waivers are incredibly difficult to get so the cost is usually prohibitive.
What About Automated Tax-Deferred Savings?
Tax-deferred accounts, like some IRAs and 401(k)s, are crucial to a healthy retirement fund. Instead of paying taxes on your money before you invest it, tax-deferred accounts invest your pre-tax money. You only pay taxes as you withdraw your money later in life.
This is helpful for maximizing your money during your working years, when you will likely be in a higher tax bracket than in retirement. Your money grows pre-tax, and then you can take advantage of the lower tax bracket in retirement when you make withdrawals.
While a 401(k) will be tax-deferred, IRAs come in a few different options: traditional IRAs are funded with pre-tax money, while Roth IRAs are funded with money after taxes. The benefit to Roth IRAs would then be that your withdrawals are not taxed in retirement.
Bonus: Is a 401(k) the Same as an IRA?
Automating your retirement contributions not only helps you make pre-tax contributions directly from your paycheck, but also makes the financial investment seem less overwhelming. For example, for 2018 the contribution limit for an IRA is $5,500 (or $6,500 for those over 50). If you get paid weekly, you can contribute $105 automatically and nearly reach that amount in 52 weeks.
The contribution limit for a 401(k) is much higher: $18,500 for 2018, with an increase to $19,000 for 2019. This does not include employer contributions, so there is some serious potential here for financial growth! Although it would take a lot more money to max out than an IRA, $365 would get you close over the course of a year.
Which Tax-Deferred Savings Account is Right for Me?
Deciding between a 401(k) and an IRA is a tough choice. While both offer the benefits of a tax-deferred retirement account, they each have pros and cons that investors should carefully research before selecting one over the other.
A traditional IRA, for example, is a tax-deferred retirement account that you typically set up yourself at an investment brokerage company like Fidelity or Schwab. As stated before, IRAs allow contributions of up to $5,500, with an additional $1,000 as “catch-up” contributions for those over 50.
Traditional IRAs require individuals to take minimum distributions after they are 70 1/2 years old. These withdrawals will be taxed but remember: since this is a tax-deferred account, you saved money early on when you initially deposited money, and you will likely save money on taxes now as you may be in a lower income bracket.
All of this is very similar to the minimum distribution requirements of 401(k)s. Yet, 401(k)s are offered by larger employers and you set up a traditional IRA on your own.
Additionally, investing in a 401(k) allows individuals to contribute more to their retirement funds, tax-deferred. Think about it: investing over $18,000 pre-tax money could even potentially drop you into a lower tax bracket.
The CalSavers and Retirement Savings Takeaway
Automated and tax-deferred retirements funds are really useful in ensuring that your money works as hard as it can for your retirement. While programs like CalSavers are not as prominent as they should be, the Small Business Majority is helping make massive strides to ensure small business employees and the self-employed can reach their retirement goals, too.
Click here for direct access to Calsavers Website.
Whether you save for retirement at work, on your own, or both, get started today, for a wealthy tomorrow.
Staff columnist Alexandra DeLuise combines her banking experience with real-world financial advice to provide simple money tips to everyday people.
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