What is the Automatic IRA Act of 2024? Small Business Retirement News

What is the Automatic IRA Act of 2024?

The Automatic IRA Act of 2024 would require employers to automatically enroll their employees into an IRA account. A version of the bill was first introduced in 2017 by Congressman Richard Neal.

With many Americans living longer, and Social Security projected to run out, saving for retirement has never been more important. Unfortunately, “nearly half of all private-sector employees lack access to a 401(k) plan or other retirement savings option through their employer,” according to AARP. The Automatic IRA Act could be pivotal in helping more Americans have access to retirement options through their employer. 

Who would the Automatic IRA Act of 2024 Impact?

Under the proposed legislation for the Automatic IRA Act of 2024, businesses with 10 or more employees would be required to offer an IRA plan if they don’t already provide other retirement options. The Act would also expand retirement coverage to independent contractors and gig workers who are commonly excluded from traditional employer benefit packages. 

Comparing an IRA to a 401(k) Plan

There are many different retirement accounts out there, but below we compare two of the most common: an IRA and a 401(k) plan. An Individual Retirement Account (IRA) is a type of savings account that is designed to help you save for retirement and offers many tax advantages. There are two main types of IRAs:

• Traditional IRA: Contributions made to a traditional IRA may be fully or partially tax deductible, depending on your circumstances. Generally, the cash in your traditional IRA (including earnings and gains) is not taxed until you withdraw it.
• Roth IRA: Contributions to a Roth IRA are not tax-deductible. However, the money you contribute to your Roth IRA grows tax-free, and distributions you make in retirement are also tax-free.

Both types of IRAs have contribution limits. As of 2024, the maximum total annual contribution for all your IRAs combined (Traditional, Roth, or a mix of both) is $7,000 if you're under age 50, and $8,000 if you're age 50 or older. 

If you are looking to maximize your savings, a 401(k) plan can provide you with increased savings opportunities. 

• Traditional 401(k) Plans: Traditional 401(k) is employer-sponsored, and employees can defer a portion of their salary into the plan before taxes are taken out. Employer matching contributions are common with 401(k) plans but not required. 

• Penelope Starter 401(k) Plans: Starter 401(k) plans are a close competitor to the state-mandated IRA plans many states are implementing. They don’t allow for an employer to match contributions, but they do allow employers to offer a 401(k) plan and take advantage of SECURE 2.0 tax credits. The Starter 401(k) offers auto-enrollment at 3% for all eligible employees. Employees are able to opt-out if they do not wish to participate in the plan. Contributions can be pre-tax or Roth.
• Penelope Safe Harbor 401(k) Plans: A Safe Harbor 401(k) is similar to a Traditional 401(k) except, a Safe Harbor plan provides all eligible plan participants with a mandatory employer contribution match. These plans also qualify for the SECURE 2.0 tax credits and allow employers to help their employees save more for retirement. Contributions can be pre-tax or Roth.

For 2024, Starter 401(k) plans have an annual contribution limit of $6,000 for those under 50 and $7,000 for those 50 years or older. Traditional 401(k) and Safe Harbor plans have an annual contribution limit of $23,000 for those under 50 years of age and $30,500 for those ages 50 or older. 

It's always better to be proactive rather than reactive. Being forced to set up a retirement plan in response to new laws can be stressful and may not result in the best outcome for your business or your employees.

By choosing to offer a retirement plan now, you can take the time to research and choose the best option for your business and your employees. You'll also give your employees the maximum possible time to contribute to their retirement accounts, which could make a big difference to their financial security in retirement.

Start Saving for Retirement Now With Penelope 

The Automatic IRA Act of 2024 represents a step toward giving every working American, whether they are a freelancer or work for a small business, a chance to save for their future. But you don’t have to wait for the Automatic IRA Act to pass to access an affordable retirement option for your employees. 

Penelope provides fast, fair, and flat 401(k) plans for businesses of all sizes. Whether you have two employees or 100, we have affordable plan options to help you start saving for retirement now. Don’t miss out on the opportunity to take advantage of tax credits for setting up a new retirement plan—schedule a complimentary call with our team to get started.