Americans often have trouble saving enough money for retirement. Working for an employer without a retirement plan makes it even more difficult to save for the future.
Only about half (49 percent) of U.S. private sector workers participate in a retirement plan, according to a Pew Charitable Trusts report. And small business employees are even less likely to be eligible for employer-sponsored plans. Only about 38 percent of smaller employers offer a retirement plan, according to a National Federation of Independent Business Research Foundation survey.
[See: 12 States Without Pension or Social Security Taxes.]
However, some states have plans to improve access to retirement accounts. Several states now provide a government-sponsored option that allows small businesses to offer retirement plans to their full-time employees. These retirement accounts are meant to be affordable and easy to administer. So far, legislation has been passed in California, Connecticut, Illinois, Maryland, Massachusetts, Minnesota, Oregon, Virginia and Washington. Several other states have had legislation on this issue introduced but not yet passed.
Here’s what a state-run retirement plan might mean for small businesses and their employees:
Not all businesses are required to participate. Each of these programs is crafted slightly differently. For instance, California’s plan eventually requires that all businesses with at least five employees enroll their workers in an IRA-like savings plan. The law, which gives businesses time to buy in, went into effect on January 1 of this year. Illinois’s program, on the other hand, only requires businesses with 25 or more employees to participate.
[Read: 7 Things You Need to Know About State-Run IRAs.]
The default contribution rate differs. Many of these plans set a standard contribution rate, which is usually around 2 to 5 percent of an employee’s gross pay. Most plans allow employees to change their contributions or opt out altogether, just like a privately run 401(k) plan or individual retirement account. Some plans also allow for employer contributions. What many of these programs have in common is that they have automatic payroll deductions. Most people will save more frequently if the money comes out of their paycheck up front, rather than having to take action to contribute to an IRA after each paycheck is received.
The tax treatment differs by state. Some plans are tax-deferred like a traditional 401(k) plan or a traditional IRA. Income tax won’t be due on this money until it is withdrawn from the account. Other retirement accounts are more similar to a Roth IRA. There’s no tax break in the year you make the contribution, but you will probably become eligible for tax-free income in retirement.
Some states are proposing innovative ideas. Washington is setting up a state marketplace for small business retirement plans. The idea behind the marketplace is that it will be easier for small businesses to find affordable, easily-managed plans when firms are competing for their business.
[Read: How to Save for Retirement on Less Than $40,000 Per Year.]
Check your state’s laws. The U.S. Department of Labor released rules allowing these government-run programs to proceed. The DOL may even allow cities and municipalities to offer such plans if they are in states that do not provide them. However, the Senate recently voted to reverse an Obama Administration rule that would have made it easier to set up state retirement accounts.
Pay attention to the legislation being proposed and passed in your state and at the federal level. If you work for a small business that doesn’t provide a retirement savings plan, you might gain access to a tax-preferred retirement savings vehicle other than an IRA. This could allow you to boost your retirement savings, since many state retirement accounts have higher contribution limits than an IRA or Roth IRA. Small business owners who participate gain an affordable way to provide retirement benefits, which could make it easier to attract and retain great employees who want to save for the future.
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States Propose New Ways to Save for Retirement originally appeared on usnews.com
