MONEY & INVESTING: Be Aware of the Pitfalls of an Auto IRA

By  //  October 8, 2021

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secure retirement savings or another tax scheme?

Every person with income from working (versus from investment) can invest, if they choose to do so, in a traditional IRA. Before opting into an autoenrollment IRA be sure to understand all ramifications of the program.

An auto IRA is a retirement account for people who do not get the option to save in an employer-sponsored traditional retirement account like a 401(k) account or a pension plan

Is the auto IRA the Democrats are pushing really in the best interest of most working Americans?

An auto IRA is a retirement account for people who do not get the option to save in an employer sponsored traditional retirement account like a 401(k) account or a pension plan. An auto IRA bridges this gap by offering people an instrument to save for their retirement, regardless of the nature of their job or industry.

The “sales pitch” for the auto IRA is that without a business providing a retirement plan to employees, they “can’t” save for retirement. However, that is a flat lie–every person with income from working (versus from investment) can invest, if they choose to do so, in an IRA. They can invest up to $6,000 (or $7,000 if 50 or older) a year.

Here is the thing politicians that are proposing this either don’t understand, or understand and really don’t care if they hurt millions of American workers: the money deposited into an auto IRA comes out of the workers paycheck, and at least for now, there is no employer match required (and if that requirement comes into play, I could see a lot of businesses close from the extra costs).

But what if that worker needs the money to pay bills or just to have fun? That’s where the catch–and a potentially big one–comes in.

If the worker just got the income in their paycheck, it would be subject to income taxes. But what if 6 percent or 10 percent of income, or whatever the politicians decide, is REQUIRED to first go into an IRA?

Then in addition to having to pay the normal income taxes, workers will also have to pay a 10 percent penalty to the government on early (prior to age 59-1/2) withdrawals from the auto IRA just to get their own money to spend.

The net result of defaulting workers into government-run Auto-IRAs is that anyone who wants what would have been their current income before they turn 59-1/2 would lose 10 percent of what they take out of the auto IRA to the government–and the government would get more of their income to spend.

Could it be that Democrats fully understood this was a way to get money from those making less than $400,000 without actually raising their taxes?

I still remember reading somewhere back in 1992 or so when the 20 percent withholding on withdrawals from company retirement plans was passed, that politicians knew many people would not be able to come up with the money to avoid taxes by rolling that money to an IRA, and actually counted on an estimated amount of extra “revenue” from the taxes and penalties those workers would then owe.

As Ronald Reagan once said, the nine most frightening words in the English language are “I’m from the government and I’m here to help.”


ABOUT THE AUTHOR

Ilene Davis, a resident of Brevard County since 1971, is a Certified Financial Planner with a bachelors degree in Mathematics from the University of Michigan, a bachelors degree in Accounting from Rollins College, and a Masters in Business Administration from Webster University.

Ilene Davis, a resident of Brevard County since 1971, is a Certified Financial Planner with a bachelors degree in Mathematics from the University of Michigan, a bachelor’s degree in Accounting from Rollins College, and a Masters in Business Administration from Webster University.  

Davis became a stockbroker in 1982, earned her designation as a Certified Financial Planner in 1984, and with a desire to serve clients more on her own terms, opened her own financial consultant office in Cocoa Village in 1986.

She has combined her professional and personal experience with keen financial insight and instinct into her first book, Wealthy By Choice: Choosing Your Way To A Wealthier Future, which was recently published by Tablet Publications of Cocoa Beach and is now available on Amazon.comBarnesandNoble.comTabletPublications.com and ChoosingWealth.com

She is committed to helping each client create their own “Financial Freedom Fund,” and believes strongly in free market capitalism and a “hand up rather than a hand-out” as the best path to prosperity.

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