In July 2019, the state of California launched CalSavers, a program designed to allow employees access to a retirement savings plan administered by the state if their employer doesn’t currently offer their own retirement savings plan.
What is CalSavers?
CalSavers is essentially a Roth IRA that was developed by the state of California to allow employees of California businesses who may not have access to a workplace retirement plan a place to start saving for retirement.
What is required for California business owners?
CalSavers is currently phasing its rollout over a 3 year period with businesses of certain sizes who don’t currently offer a qualified retirement plan to eligible employees required to enroll by certain deadlines. The CalSavers (calsavers.com) website outlines the three-year rollout and required deadlines for employers, however, by June of 2022, California businesses who employ 5 or more eligible employees must either offer a qualified retirement plan or participate in CalSavers. Currently, it appears that employers are only responsible for initially enrolling their business in CalSavers, providing CalSavers a list of current eligible employees, withholding from payroll and submitting to CalSavers employee contributions, and removing employees who have terminated. Employers are not responsible for actually enrolling the eligible employees, providing information or answering questions about the program, or maintaining or servicing the employee accounts. These types of requests are handled directly by CalSavers. Most importantly, employers SHOULD NOT provide any guidance or advice on the investment options offered by CalSavers nor should they provide any tax advice.
How is CalSavers different from a Roth IRA?
There are several similarities to CalSavers and a Roth IRA. Just like a Roth IRA, your contributions to CalSavers are after-tax. In other words, there are no up-front tax savings by contributing to a CalSavers account. However, down the road, provided you meet certain requirements, any earnings on the account may potentially be able to be withdrawn tax-free. Also, like a Roth IRA, if your income exceeds annual limits per IRS guidelines, you will not be able to contribute CalSavers. Currently, the maximum contribution to CalSavers is the same as a Roth IRA – $6,000 per year for people under 50 and $7,000 for people over 50 (provided you earn at least $6,000 or $7,000 in wages). Also, keep in mind, $6,000 or $7,000 per year is the maximum you can contribute between ALL of your Traditional, Roth, and CalSavers Roth IRAs no matter if you have one account or ten accounts. It is your responsibility to track your contributions to various IRA accounts.
In terms of where employees can invest their contributions, CalSavers currently offers participants 16 investment options to pick from. This is a step up from the now-defunct myRA program that the federal government rolled out in 2015 and subsequently shuttered in 2017. The myRA was also a Roth IRA program, but the only investment options available were Treasury bonds. CalSavers appears to offer a wider range of investment options which may allow participants an opportunity for longer term growth potential.
How can you fund a CalSavers account?
Funding a CalSavers account is pretty simple. You simply designate a percentage of your paycheck that you want to contribute. Employers are required to withhold contributions from employees’ paychecks and submit them to CalSavers. Please note, that it is up to the employee to make sure they track their contributions up to the maximum annual IRS contribution limit for all of their traditional, Roth, and CalSavers Roth IRA accounts.
Although CalSavers may seem like a duplicate of other already available retirement savings programs, it can be, if you are eligible, a convenient alternative in that it offers a disciplined and systematic way to save for the future on a regular basis through employer deductions from your regular payroll.
Gary E. Croxall, CFP®, Registered Principal of LPL
Soren E. Croxall, CFP®, CFA Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.