Choosing a Retirement Plan: Payroll Deduction IRA


The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. No plan document needs to be adopted under this arrangement.

  • The employer has no filing requirements.
  • Only employees make the contributions.
  • Any size business can provide this.

Under a Payroll Deduction IRA, an employee establishes an IRA (either a Traditional or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction for the IRA.

The employer’s responsibility is simply to transmit the employee’s authorized deduction to the financial institution. In general, if this arrangement is offered to any employee then it should be offered to all employees.

The Payroll Deduction IRA is essentially a “no fuss, no muss” situation.

How does a Payroll Deduction IRA work?

Pasco Company offered its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees set up for themselves. Rebecca, a Pasco employee, signs up for the program and has $100 of her $1,000 bi-weekly paycheck deposited into her IRA for a yearly total of $2,600. At year-end Pasco reports the full $26,000 she earned on her Form W-2 and she would add the $2,600 to any other IRA contributions she made during the year in calculating her maximum contribution and Form 1040 IRA deduction.

Pros and Cons:

  • Easy to set up and operate.
  • Little administrative cost or requirements.
  • Employers may receive little credit for this service from employees.
  • No deduction for the business.
  • Employees may or may not be able to deduct their contributions.

Who Contributes: Only the employees. The employees control where their money is invested.

Contribution Limits: Payroll Deduction IRAs have the same limits as other IRAs.

Filing Requirements: Employer has no filing requirements.

Participant Loans: Not permitted. The assets may not be used as collateral.

In-Service Withdrawals: Yes, but subject to income tax and 10% additional tax if under age 59 ½.

Additional Resource

Pub 4587 PDF, Payroll Deduction IRAs for Small Businesses