Things You Should Remember About Automatic IRAs

You are living in a world where almost everything runs on automation. Most of your home mechanics work at the press of a button, banking happens online, and even cars are becoming self-driven.

So why should financial planning be any different?

Automation does not just make life easier. It can also help you build a more secure financial future. One simple way it does this is through an Automatic Individual Retirement Plan. You may already be familiar with a regular Individual Retirement Account (IRA).

But have you heard of an Auto IRA?

Auto IRAs are not a technological advancement, but they are designed to make saving for retirement easier, especially for people without access to an employer-sponsored retirement plan. This article is here to tell you all you need to know about Auto Individual Retirement Accounts.

What is an individual retirement account?

An IRA is a retirement savings account that you fund on your own. It offers tax advantages while helping you build a retirement savings pool.

There are two types of IRAs – Traditional and Roth. Depending on the type of IRA you choose, your money can either grow tax-deferred or be taxed upfront. IRAs come with a few important rules. In most cases, you should not withdraw money before age 59½. If you do, you may have to pay taxes and penalties. There is also a five-year rule that states that the account needs to be open for at least five years before you can take certain tax-free withdrawals, depending on the type of IRA.

An IRA is not employer-sponsored. Unlike a 401(k), it does not come through your workplace. You open and manage it yourself. You can open an IRA at a brokerage firm, bank, or other financial institution. Once it is open, you decide how much to contribute as per the annual limits. You also have complete say over how the money is invested.

Now that you know what an IRA is, let’s talk about an Auto IRA

An Auto IRA is a retirement savings account offered through state-run automatic enrollment programs. These programs were created to address the problem of limited access to workplace retirement plans, such as 401(k)s. Since many employers do not offer 401(k)s, many people miss out on the benefits of tax-advantaged retirement accounts.

This is primarily why Auto Individual Retirement Accounts were introduced.

If you work for an employer that does not offer a retirement plan, and you live in a state with an Auto IRA program, your employer may be required to enroll you in a state-run IRA automatically. Auto IRAs can be set up as Traditional IRAs or Roth IRAs, depending on the state program. You do not have to fill out paperwork or open the account yourself. The employer does this for you. Once you are enrolled, contributions are deducted from your paycheck. Most Auto IRA programs start you off with a default contribution rate of around 3% to 5% of your salary. But you are not forced to stick to this rate forever. You can increase or reduce your contribution anytime you like. You can also quit the Auto IRA plan. Additionally, the funds deposited into the account are yours, and the account stays with you even if you change jobs.

Now you need to understand that, even though Auto IRAs were introduced to bridge the gap left by 401(k)s, they do not function as 401(k)s in most respects. Unlike a 401(k) that offers an employer match, your employer does not contribute to your Auto IRA. The employer is only tasked with payroll deductions and enrolling eligible employees.

More and more states are rolling out Auto IRA plans each year. For now, the following states have active Auto IRA programs:

• California
• Colorado
• Connecticut
• Delaware
• Illinois
• Maine
• Maryland
• Massachusetts
• New Jersey
• Oregon
• Vermont
• Virginia
• Washington

Several other states are in the process of launching their own versions. That said, even if your state offers an Auto URA, not every employer is required to participate. Some employers may be exempt. Most commonly, employers with fewer than 5 to 10 employees, those that have been in business for less than 2 years, or companies that already offer another qualified retirement plan are not obligated to offer an Auto IRA plan. And, employers cannot shut down an existing retirement plan just to switch to a state Auto IRA program.

How do Auto Individual Retirement Accounts work?

In states with Auto IRA programs, most private employers that do not sponsor their own retirement plan are required to enroll eligible workers in a state-facilitated IRA. Once you are enrolled, a preset percentage of your pay, typically between 3% and 5% of your earnings, is automatically deducted (hence the name) from your paycheck and deposited into your IRA.

Many Auto IRA plans also include something called auto-escalation. Here, your contribution rate increases gradually over time, usually once a year, unless you choose to stop or change it. And, of course, participation is not mandatory for you as an employee. You can opt out at any time, reduce your contribution percentage, or increase it to save more.

Like most retirement plans, Auto IRAs have administrative fees to cover account maintenance and investment management. These fees are generally modest and vary by state, but they typically range up to $30 per year and/or around 0.25% to 1% of your account balance.

Most Auto IRA contributions are directed into Roth IRAs, so the qualified withdrawals in retirement are tax-free. Some states may add a traditional IRA option in the future, but Roth IRAs are the default in most programs today. Auto IRA plans are very easy to maintain and affordable for employers. Companies do not pay any costs, do not contribute matching funds, and are not responsible for managing investments. Their main job is to make sure you are enrolled and that payroll deductions are processed correctly.

Once your money is in the account, you will usually be offered a menu of investment options. These commonly include target-date funds, which automatically adjust your investment mix based on your retirement age. You also get a decent selection of stocks, bonds, and income funds. You can select investments on your own or consult with a financial advisor. However, if you do not choose an investment, your contributions are typically placed into a default option designed to be age-appropriate.

Let’s look at a few state examples:

In Maine, the Auto IRA plan is called the Maine Retirement Investment Trust (MERIT). It was enacted in 2021 and launched in 2023. Employers with five or more employees who do not offer a retirement plan must participate in it. Self-employed individuals and smaller employers can also join MERIT voluntarily. Employees are enrolled in a Roth IRA with contributions starting at 5% of pay, which automatically increases each year until they reach 8%, unless the employee opts out or makes changes.

Oregon was actually the first state to offer an auto-IRA. It is called Oregon Saves and was implemented in 2017. Now, many other states have similar programs. Massachusetts operates a similar plan called the Massachusetts Defined Contribution CORE Plan, New York offers the New York State Secure Choice, and Nevada runs the Nevada Employee Savings Trust (NEST). Other states also have state programs. However, the exact features of these plans can vary. It is important to speak with your employer or a financial advisor about the IRA plan offered in your state.

How can you access a state-run Auto Individual Retirement Plan?

Step 1: Check your eligibility

The first and most important step is to confirm your eligibility. State-run Auto IRAs are for employees who do not have access to a 401(k) or any other qualifying workplace retirement plan. So, if your employer already offers a retirement plan, you generally will not qualify for a state Auto IRA.

If your employer does not offer a retirement plan, you are likely eligible. Self-employed individuals can also open an Auto IRA in many states, as long as they meet the state’s specific requirements.

Step 2: Check whether your state offers an Auto IRA program

Not every state has launched a state-administered Auto IRA program yet. The next step is to find out whether your state offers one. If your state does not currently have a program, you will not be able to participate just yet.

That said, many states are rolling out Auto IRA programs. If your state does not have one today, you can check in the future.

Step 3: Look out for your enrollment invitation

If you live in a state that offers an Auto IRA and your employer has joined the program, you usually do not need to initiate anything yourself. You will receive a notification, either by email or regular mail, informing you that your employer is participating in the state Auto IRA program.

This message will include:

• An access code or registration link
• Instructions on how to access your account
• Details about your default contribution rate and investment option

Step 4: Enter the required information

When signing up, you will typically need to provide basic details such as:

• Personal identification
• Bank or payroll information
• Contact information

Step 5: Start saving

You can stay enrolled and start saving automatically. You can also change your contribution percentage or choose different investment options. There is also an option to opt out of the program entirely.

Should you invest in an Auto Individual Retirement Account?

Yes, you absolutely can, if you qualify and do not already have a retirement account. After all, you will need money in retirement, and the earlier you start, the better off you will be.

If you work for a small business or a company that does not offer a 401(k) or any other retirement plan, an Auto IRA plan may be one of the best options available to you. An Auto IRA offers many of the same benefits as a traditional IRA and even borrows a few conveniences from 401(k) plans. For example, contributions are made through automatic payroll deductions, so you do not have to remember to transfer money every month. Your investments are handled by an administrative team, and you are placed into a default investment option to get you started. If you want to make changes later, you are free to do so.

One of the biggest advantages is that enrollment is automatic. If you are eligible and your employer participates in a state-run Auto IRA program, you are enrolled by default. You can always opt out if you choose, but automatic enrollment makes it much easier to start building your retirement savings without having to look for options yourself.

Are there any limits or disadvantages to an Auto Individual Retirement Account?

Yes, there are a few limitations you should be aware of.

One of the most significant drawbacks is the lack of employer contributions. Auto IRAs were created to fill the gap for workers who do not have access to a 401(k), but unlike a 401(k), employers are not allowed to contribute. There are no matching contributions and no free money. Everything that goes into the account comes entirely from your paycheck.

The investment options within an Auto IRA plan may also not always be ideal for everyone. Auto IRA programs usually offer a limited set of investments selected by the state. You might be able to find better-performing investments or lower fees if you open an IRA on your own through a brokerage.

Each state-run Auto IRA program has its own fee structure, too. While Auto IRAs are generally low-cost. Having said that, most programs do charge an annual administrative fee or a small percentage of your account balance.

And the biggest drawback of all is that Auto IRAs are not available everywhere. At the moment, only a limited number of states offer state-run Auto IRA programs. While more states are expected to roll out similar programs in the future, you may simply not have access to one yet, depending on where you live and work.

Should you opt for an Auto Individual Retirement Account?

If you qualify for an Auto IRA, use it. If you do not have any other retirement plan in place, an Auto IRA can help you get started. Even if you already have a retirement plan that is doing well, you can still consider an Auto IRA. After all, it is another tax-advantaged account, and using multiple retirement vehicles can help you manage taxes better over time.

That said, deciding how much to contribute and which investments to choose is something where speaking with a financial advisor can really help. Explore our financial advisor directory to find a financial advisor near you.

Frequently Asked Questions (FAQs) about Auto Individual Retirement Accounts

1. What is the contribution limit for Auto IRAs?

Auto IRAs follow the same contribution limits as regular Traditional and Roth IRAs. For 2026, you can contribute up to $7,500 per year. If you are 50 or older, you are allowed an additional catch-up contribution of $1,100.

2. How much will my contribution rate be?

The contribution rate varies by state, but most Auto IRA programs start with a default contribution of 3% to 5% of your income.

3. Do the fees come out of my money?

Yes. Any administrative or investment fees are deducted directly from your Auto IRA plan balance.

4. What if my state does not offer an Auto IRA?

If your state does not yet offer an Auto IRA, you will not be able to participate in one for now. You can look for a job in a state that already has an Auto IRA plan. In the meantime, you can also consult a financial advisor to explore other retirement planning options, such as opening a Traditional or Roth IRA on your own.

For additional information on retirement planning strategies tailored to your specific financial needs and goals, please visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management services based on a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.