Opinion: IRA accounts with payroll deduction are getting cheaper and easier

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The technology associated with payroll deduction IRAs makes it easier and cheaper for employers to enroll their employees in these accounts. That is wonderful. At any given time, about half of private sector workers, primarily those in small businesses and those receiving relatively lower wages, do not have an employer plan at work, and being enrolled in an IRA dramatically increases their chances of getting paid. be prepared for retirement. The new state auto-IRA programs, which are currently in operation in California, Illinois, and Oregon, are designed to address this problem.

Read: $ 100,000 in Retirement Savings for Low-Wage Workers? However, new technology enthusiasts may see a market for IRAs with payroll deductions beyond the new state programs. They argue that the growing number of relatively high-wage workers hired could benefit from easy access to an IRA account. And, in this context, they argue that IRA contribution limits need to be raised to be comparable to 401 (k) plans. That is, the employee contribution to IRAs must be increased from $ 6,000 to $ 19,500 for those under 50 years of age and from $ 7,000 to 26,000 for those aged 50 and over (see table 1).

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At first, that seems perfectly reasonable. It would simplify the system and allow higher paid workers without a plan to save more. But in fact, increasing IRA limits runs the risk of crowding out 401 (k) accounts. Such a step would undermine our existing retirement system because 401 (k) plans are better for employees than IRAs. IRA accounts lack significant nondiscrimination standards that limit the ability to skew profits in favor of owners and executives; and they also lack ERISA’s protections for reckless investment plan participants, excessive fees, and the like. In fact, 401 (k) rates have been dropping, due in part to rate disclosure rules, which require 401 (k) plans to disclose their rates in an easily understandable format. Financial services companies that handle IRAs do not face such a requirement. Currently, employers have no incentive to drop or refrain from adopting a 401 (k) in favor of a payroll IRA, because 401 (k) allow significantly more generous tax-friendly contributions than IRAs and offer the possibility of employer contributions. Increasing the IRA contribution limits would alter that calculation. Also, current IRA contribution limits are unlikely to serve as a restriction for most workers without a retirement plan. These workers tend to work for smaller companies and receive lower wages. As shown in Figure 1, only 21% of workers aged 25-64 with incomes in the top quartile of the income distribution did not have an employer plan compared to 73% of those with incomes in the quartile lower.

In 2020, the median earnings for a worker aged 25 to 64 (excluding the self-employed) was about $ 55,000. The current IRA contribution limits would allow everyone who is not covered in the bottom two quartiles of the income distribution to contribute more than 10% of their income to a retirement plan, a rather ambitious goal for those who pay less. . The relatively small percentage of uncovered workers in the top quartiles may be somewhat limited, but that risk is not worth undermining our entire retirement income system. Read more retirement news and tips