Although individual retirement arrangement accounts provide important tax benefits, in many cases these benefits do not translate into savings on your payroll taxes through pretax salary reduction. Any deductible IRA contributions, such as many made to a traditional IRA, must be deducted directly on the income tax forms you file after the end of the tax year. This should not be confused with employer-sponsored plans that do reduce your total salary on which you pay taxes, such as a 401(k) plan. A SIMPLE is one type of IRA that does provide the benefit of pretax deductions.
Employer-Sponsored Payroll-Deduction IRA
Your employer has the option of setting up a payroll-deduction IRA for you. This is a basic retirement plan option that you control completely. Your contributions to this plan are not deducted from your taxable income on your W-2, meaning that your contributions are made on an after-tax basis. In addition, your W-2 will not indicate that you are a participant in an employer-sponsored retirement plan. This type of IRA is offered mainly as a convenience, and you must fund the contributions on your own completely.
Operating Your Own Payroll-Deduction IRA
If your employer does not offer a payroll-deduction IRA but you still want an IRA with the convenience of payroll deduction, you might be able to set up a direct-deposit arrangement with your IRA provider. Many IRA providers can receive funds through direct deposit. And most employers who offer direct deposit let you split your paycheck among multiple bank accounts, one of which can be for your IRA. Contributions made this way do not affect your payroll taxes.
Your employer can set up a savings incentive match plan for employees, or SIMPLE IRA. This is a type of IRA that a company uses as a retirement plan for its employees, and the company makes matching contributions. These employer contributions are salary-reducing, and on a pretax basis. These contributions reduce the amount of income shown on your W-2 form at the end of the year.
Adjusting Your Withholdings
If you are making an IRA contribution that does not reduce your salary directly but is still tax-deductible, you might want to increase your withholding allowances to reduce the amount of taxes withheld from your paycheck. File a new W-4 form with your employer, completing the deduction and adjustment worksheet. Make sure to enter the amount you plan to contribute to both your own IRA and your spouse's IRA on line 4, as well as the total of any other deductions or adjustments you expect. Complete the form, and give it to your employer's payroll department.