Can I Have a Payroll Deduction for an IRA?

Payroll deductions are a painless way to build your IRA nest egg.

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Regular contributions to an individual retirement account are important if the IRA is to become a valuable asset in your overall financial planning for retirement. Despite the best of intentions, many working people make only sporadic contributions to their IRAs and might welcome a way to automatically and painlessly build up their IRAs. Such a way exists.

IRA Payroll Deduction

Employees can have a payroll deduction for their IRA if their employer agrees to set up a plan that allows employees to contribute to a traditional or Roth IRA via a payroll deduction every pay period. Payroll deduction IRA plans are a way for employers to help their workers save for retirement without the responsibilities of an employee retirement benefit plan. No laws or regulations require an employer to offer payroll-deduction IRA plans. The participating employee sets up an IRA with a financial institution such as a bank or mutual fund company. The employee then authorizes his employer to withhold a sum of money from his paycheck each pay period and deposit the withheld funds into the IRA at the employee's financial institution.

Easy Plan

A payroll-deduction IRA doesn't require employers to file any plan documents with government agencies. The IRA is owned by the employee, who determines how much to deduct. The employer's involvement is limited to collecting the worker's contributions and sending them to the IRA custodian. There are no government reports to file and no employer fiduciary responsibility. An employer can limit the number of financial institutions to which it will remit IRA contributions. Businesses of any size can establish a payroll-deduction IRA program, but they must offer all employees the opportunity to participate.

Contribution Limits

IRA contributions through payroll deductions are subject to the same annual dollar limits that apply to direct deposits to an IRA. Employees under age 50 cannot contribute more than $5,500 a year as of 2013, including amounts contributed through payroll deductions. The limit is $6,500 a year for workers over age 50. Employees who contribute to a traditional tax-deferred IRA through a payroll deduction still can claim their contributions as a tax deduction. The W-2 from their employer won't list their IRA contributions and will indicate the worker is not covered by a retirement plan. IRA contributions will be reported to the employee and IRS on a Form 1099-R from their financial institution.

Plan Termination

An employer can terminate a payroll-deduction IRA program at any time simply by notifying employees that it will no longer be deduct contributions from paychecks as of a certain date. The employer doesn't have to file any termination notices with the government. Employees can continue contributing to their IRA by making direct payments to their IRA custodian.