These states automatically enroll you in Roth IRAs: Here's what you need to know

It can be difficult to set aside money from each paycheck to invest for retirement. If your employer doesn't offer you any retirement benefits, like a 401(k), it can be a struggle to prioritize your retirement savings over more immediate needs like an expensive car repair or child care. 

A 2014 report from AARP found that nearly one-half of American private sector employees, or nearly 55 million employees, did not have a retirement plan through their employer. Some state governments are looking to make it easier for individuals without employer-sponsored 401(k)s to invest for retirement with automatic IRAs. 

"If you don't have a workplace retirement savings system, an individual has to go out and open their retirement accounts themselves," says David John, a senior strategic policy advisor at the AARP Public Policy Institute. "And with the exception of wealthier individuals, the vast majority of individuals don't do that."

There are currently 10 states and two cities that are either actively implementing or have implemented automatic IRAs, according to research from the Georgetown Center for Retirement Initiatives. Three states — California, Illinois and Oregon — have auto IRA programs already operating. 

Looking forward, there are a number of states — including Maryland, Connecticut, Colorado and New Jersey — that are either launching auto IRAs or are in the planning stages of creating them, according to the CRI.

Oregon

Program: OregonSaves

Types of funds offered: Multiple target-date funds, a capital preservation fund and a growth fund

California

Program: CalSavers

Types of funds offered: Multiple target-date funds, ESG fund, core bond fund and global equity fund

Illinois

Program: Illinois Secure Choice

Types of funds offered: Multiple target date funds, a conservative fund, a growth fund, and a capital preservation fund

Connecticut

Program: MyCTSavings

Launch date: early 2022

Maine

Program: Maine Retirement Savings Program

Launch date: employer enrollment is in waves, occurring between spring 2023 and spring 2024

Maryland

Program: MarylandSaves

Launch date: mid-2022

New Jersey

Program: New Jersey Secure Choice Retirement Savings Program

Launch date: to be determined

New York

Program: New York State Secure Choice Savings Program

Launch date: to be determined

Virginia

Program: Virginia IRA Savings Program

Launch date: on or before July 1, 2023

While auto IRA programs vary by state, these accounts are typically available to individuals who don't receive retirement benefits through their employer. Auto IRAs are state-run programs that automatically deduct between 3% and 5% from each paycheck and place it into an IRA that is managed by an investment company. Individuals are typically able to opt-out at any time. These retirement accounts are usually portable, too, so people don't have to worry about rolling over their money into a new account if they switch jobs.

California, Illinois and Oregon already have programs in place that automatically invests an employee's money in a Roth IRA if they don't have an employer-sponsored plan. With a Roth IRA, individuals contribute after-tax money and watch their investments grow tax-free.

All three states offer individuals the option of investing in different types of investment funds. Target-date funds are one of the primary investment funds offered by auto IRAs, which builds your investment portfolio around the date you plan to retire. These funds are a combination of stock and bond funds that vary depending on your age — as you get older, your portfolio becomes more conservative, and you'll have a higher allocation of bonds than stocks.

All three states also automatically increase an individual's retirement saving rate each year, with the option of opting out of this feature. For example, CalSavers starts individuals at a 5% of gross pay savings rate and automatically increases it by 1% annually, until the savings rate hits 8%.

By automatically deducting money from each paycheck for retirement, individuals don't have worry about spending money they want to earmark for retirement.

"One thing we know about saving in general and especially retirement savings is that it needs to be as easy to do and to understand as possible," says John.

There's some evidence that these IRAs are encouraging more people to save for retirement: After California and Oregon adopted their auto IRA programs, both states had some of the highest proportion of new retirement plans opened in 2019. According to a report by Brookings, about 276,000 people in California, Oregon and Illinois have already contributed nearly $176 million to auto IRA accounts.

Additionally, since individuals are automatically enrolled in retirement accounts, they may be less likely to opt out. For OregonSaves, the opt-out rate was 33% and for CalSavers, the opt-out rate was 33% in July 2019.

These retirement accounts offer a lot of options for investors.

With Roth IRAs, individuals can contribute up to $6,000 annually, and if you're above the age of 50, you're eligible for catch-up contributions of an additional $1,000 (maximum contribution is then $7,000).

Not everyone is eligible for a Roth IRA, though. In 2021, single-filers had to make less than $140,000, and married couples filing jointly had to make less than $208,000 to be eligible for a Roth IRA. There are phase-out limits on Roth IRAs, so if you're a single-filer making above $125,000 but below $140,000, you'll only be eligible to contribute a reduced amount. For married couples filing jointly, the phase out-limit is $198,000.

In 2022, the income limits for Roth IRAs are increasing: single filers must make less than $144,000 and married couples filing jointly must make less than $214,000.

Roth IRAs are easier to withdraw money from than traditional IRAs. With a Roth IRA, individuals can withdraw their contributions at any time without having to pay a penalty fee or taxes (as long as you've waited five years after your first contribution). Withdrawing investment gains from a Roth IRA before you're age 59 and 1/2 incurs a 10% early withdrawal penalty fee and may be subject to income taxes unless those withdrawals are being used for qualifying expenses.

However, with a traditional IRA, any funds (earnings or contributions) that are withdrawn before an individual is age 59 and 1/2 will incur a 10% early withdrawal penalty fee and will be taxed at your income tax rate.

If you don't live in a state that offers auto enrollment, and your employer doesn't provide a plan, it's not terribly difficult to open an IRA on your own.

You have your choice between traditional IRAs and Roth IRAs, and there's some differences between the two accounts. With traditional IRAs, there are no income limits, so anyone can contribute regardless of how much they earn. Traditional IRAs also don't have the same tax benefits as Roth IRAs.

With traditional IRAs, individuals don't pay taxes until they withdraw funds for retirement, so you'll end up paying taxes on your investment gains. If you think you'll end up in a lower income tax bracket in retirement than you are now, a traditional IRA could be a good option for you. On the other hand, Roth IRAs are a good choice if you're a low earner now and don't want to a pay a higher income tax rate on your retirement distributions later on.

When looking to open an IRA, consider a brokerage that charges low fees and offers a variety of different investment options. Charles Schwab, Betterment, and Vanguard all offer retirement accounts with a many different investment options and low fees. It only takes a few minutes to sign up and the long-term pay-off can be significant if you're trying to build wealth.

Catch up on Select's in-depth coverage of personal finance, tech and tools, wellness and more, and follow us on Facebook, Instagram and Twitter to stay up to date.