You’re watching Payroll Deduction IRAs for Small Employers. The information in this presentation is current as of the date it was recorded and should not be considered official guidance. Let’s get started.

Are you a small employer that would like to help your employees save for retirement, but you’re not ready to commit to a 401k or other workplace retirement plan? Have you thought about a Payroll Deduction IRA?

It’s easy to set up and can encourage employees to start saving for their retirement today.

Payroll deduction IRAs have the fewest legal requirements of any retirement arrangement and are the easiest for an employer to start and maintain. There are no plan documents to adopt or forms to file, nothing to test, and no age or service requirements to track like you would find in other plans. An employer sets up a payroll deduction IRA program with any bank or financial institution that offers IRAs.

An employee then opens a traditional or Roth IRA at the financial institution and authorizes the employer to deduct after-tax amounts from their pay and forward to their IRA account.

Your role as the employer is to collect those IRA contributions from the employees’ paychecks and transmit them promptly to the IRA institutions.

You’re allowed to pay the fees the IRA provider charges for setting up the payroll deduction program, but the employee pays any fees related to setting up and maintaining their IRA account.

You can't negotiate any special terms with the financial institution or have any influence over the employee’s investment options.

You can encourage your employees to save for retirement by providing general information about the IRA program, along with educational materials on the benefits of saving.

Employees decide if they want to participate in the payroll deduction IRA and how much to have deducted from their paychecks. IRA contributions are reported as regular compensation on the employee’s paycheck and are subject to federal tax withholding. Employees are solely responsible for deciding how their IRA is invested and they bear all investment risk.

IRA contributions for 2021 are limited to $6,000, or $7,000 if age 50 or older. See IRS.gov/PlanCola for the limits in other years.

Employees determine if their traditional IRA contributions are deductible. Loans aren't allowed from an IRA account; however, employees have complete control of their IRA and can make withdrawals at any time.

Withdrawals from traditional IRAs are subject to ordinary income taxes.

And amounts withdrawn before age 59 ½ may be subject to a 10% additional tax on early distributions.

Contributions made to a Roth IRA don't provide a current year tax deduction. The tax benefit of a ROTH IRA is the owner will not pay tax on the earnings if the withdrawal is made after age 59½ and the account is at least 5 years old.

The Saver’s Credit is available for contributions made to both traditional and Roth IRAs.

The credit is worth up to 50% of the amount of the IRA contribution, depending on income level.

The maximum IRA contribution that’s eligible for the Saver’s Credit is currently $2,000 each year, or $4,000 if the employee is married filing jointly. Go to IRS.gov/SaversCredit for more information.

Employers can discontinue a payroll deduction IRA at any time by notifying their employees of the change. The IRAs remain in each employees’ name, so they have complete control of their funds.

To learn more about the basics of setting up Payroll Deduction IRAs, check out Publication 4587, Payroll Deduction IRAs for Small Businesses, on IRS.gov.