Payroll Deduction IRAs Are a No-Cost Benefit

If you've considered setting up a retirement plan for your employees and decided it was too costly or too much trouble, there is an alternative. No matter how big or small your business is, your employees can participate in a Payroll Deduction IRA at virtually no cost to you.

Here's how a Payroll Deduction IRA works: Each employee who wants to participate establishes a traditional or a Roth IRA with his or her own bank and authorizes you, the employer, to make payroll deductions. Your only responsibility is to forward the money withheld to the financial institution.

Sound easy? It is. In fact, it is the simplest retirement plan available for businesses to institute. There are no plan documents to adopt and no reports to file.

There is little difference between the Payroll Deduction IRA and an IRA that an employee might establish and contribute to on his own. The real benefit is for staff members who need to save for retirement but find it hard to set aside the money for regular contributions on their own.

Limits and Guidelines for Payroll Deduction IRAs

• If Payroll Deduction IRAs are offered, they must be made available to all employees. (For employee contribution limits, see right-hand box.)
• Employees are responsible for establishing their own IRAs with their own financial institutions.
• Only the employee contributes to the account through payroll deduction.
• Employers make no contributions and have no filing requirements.
• The employer receives no tax deductions (other than the regular deductions for payroll costs).
• Participant loans are not permitted.
• Assets may not be used as collateral.
• Withdrawals are subject to income tax and a 10% penalty if the participant is under age 59 1/2.

Eventually, your business may decide to establish a retirement plan that includes employer contributions and discontinue the Payroll Deduction IRA. If that day comes, your benefits advisor can help you make that switch.

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