If you are considering a retirement plan for your business, a payroll deduction IRA is the simplest option. No plan documents are needed. As an employer, you have no filing requirements, and you do not make contributions. What could be simpler than that?

A payroll deduction IRA is available to any size company. As an employer, you agree to deduct an employee-authorized amount from the employee’s wages. That’s it. The employee establishes a traditional or Roth IRA at a financial institution. The employee authorizes the employer to deduct a set amount from each paycheck and deposit it into the employee’s IRA.

How does a Payroll Deduction IRA work?

A business offers its employees a chance to participate in a payroll deduction IRA. The employee sets up an IRA at a location financial institution and authorizes the business to deduct $200 from her monthly paycheck. At the end of the year, her contribution to the IRA is $2,400.

At year-end, the business completes a W-2 with the employee’s full salary, plus all deductions. It is the employee’s responsibility to add her $2,400 contribution to any other contributions she made during the year to determine if she has met the maximum contribution for the year. The maximum contribution may change from year to year. For 2019 and 2020, the maximum amount is $6,000, unless the contributor is over 50. Then, the maximum increases to $7,000.00.

What are the Pros and Cons of a Payroll Deduction IRA?

The payroll deduction IRA is easy to set up and operate. As an employer, you have little administrative costs or filing requirements. It is a simple way to encourage your employees to plan for retirement.

Not all employees will view the opportunity as an employer-provided benefit. The business cannot take a deduction and not all employees may be able to deduct their contributions. The IRA cannot be used as collateral, and a penalty applies for early withdrawal. If an employee withdraws any amount before age 59 and 6 months, he will pay income tax on the amount plus a 10% penalty.

A payroll deduction IRA is an excellent retirement tool for employees. It requires minimal company involvement or cost, but it provides a painless way for employees to start saving for retirement.

Have more questions about retirement administration? Schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with the retirement plan evaluator.