Payroll Deduction IRA

 

Under a Payroll Deduction IRA, employees establish a Traditional or Roth IRA with a financial institution and authorize a payroll deduction amount for it. A business of any size, even self-employed, can establish a Payroll Deduction IRA program.

Participate in a Payroll Deduction IRA

The benefits of saving now can help you get ready for a retirement that can last 30 years or more.

For additional information on participating in a Payroll Deduction IRA, see Payroll Deduction IRAs for Small Businesses.

Choose a 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
  • Employee contributions may be eligible for the Saver’s Credit
  • No deduction for the business
  • May not create the same goodwill with employees as a 401(k) or other workplace retirement plan

Who Contributes: Employees make all contributions and 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: IRA rules don’t permit loans or assets to be used as collateral.

Withdrawals: Employee may withdraw contributions at any time, subject to income tax and 10% additional tax if under age 59½.

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Establish a Payroll Deduction IRA

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

Your responsibility as an employer is simply to transmit the employee's authorized deduction to the financial institution. In general, if you offer this arrangement to any employee, then you should offer it to all employees.

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Operate a Payroll Deduction IRA

What are the employer's administrative responsibilities?

  • There are no annual filing or reporting requirements for a Payroll Deduction IRA.
  • The employee's Form W-2 will not reflect the IRA contributions and will indicate that the employee is not a participant in a retirement plan.
  • No separate statements need to be provided to the employees.

Who is eligible for participation?

Any employee who performs services for your company is eligible to be included in a Payroll Deduction IRA. If you offer it to one employee, then you should offer it to everyone.

What are the contribution rules?

  • Employees fund their own Payroll Deduction IRA through an after-tax deduction from their paycheck.
  • After an employer forwards the payroll deduction to each employee’s IRA account at the  financial institution, they have no further responsibility for the amounts contributed.
  • Contributions to each employee's IRA are limited.

Investments:

  • Each employee chooses how to invest their IRA and can roll it over to another IRA.
  • The financial institutions selected will manage the funds.
  • Payroll Deduction IRA contributions can be invested in stocks, mutual funds, money market funds, savings accounts and other similar types of investments.

What are the vesting rules?

Each employee is always 100% vested in (or has total ownership of) the contributions to their Payroll Deduction IRA.

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Terminate a Payroll Deduction IRA

To terminate a Payroll Deduction IRA, notify your payroll organization that you will no longer be making this service available to your employees and that you want to terminate the contract or agreement with it. You should also notify your employees that the Payroll Deduction IRA has been discontinued.

You do not need to give notice to the IRS that you terminated your Payroll Deduction IRA. See Publication 3998 or consult with your financial institution to determine if another type of retirement plan might better suit your needs.

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Additional Resources

Forms, publications, frequently asked questions, etc.

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