Tags: Retirement | payroll deduction IRAs | retirement

What Are Payroll Deduction IRAs

By    |   Wednesday, 12 August 2015 01:32 PM

A payroll deduction IRA allows an employee to authorize a deduction from his or her paycheck to be deposited into a private IRA. The plans are among the simplest ways for workers to invest for their retirement, American Funds noted.

Employees set up a traditional or Roth IRA plan and determine how much to contribute to the plans through their paychecks. Employers, however, are not allowed to contribute to the individual plans of the employees.

With a traditional IRA, employee contributions are tax deferred. The employee pays taxes when money is withdrawn, usually during retirement. Roth IRA contributions are made with money that has been taxed and can be withdrawn without being taxed.

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An IRA, which stands for individual retirement account, is a savings account under IRS guidelines that comes with tax advantages so the employee can put money away for retirement, CNN Money said. A payroll deduction IRA is set up through a financial institution, such as a bank, mutual fund or life insurance company. The employee selects the stocks, bonds, mutual funds and other assets for investments.

Money for the investments is deducted from the employee’s wages by the employer’s payroll department. It is deducted just as it is for federal and state taxes or benefit plan premiums.

In 2015, contributions to IRAs were limited to $5,500 a year unless the person is age 50 or older, when contributions can increase to $6,500 per year, according to the IRS.

Payroll deduction IRAs are simple for the employer as well with the understanding of making the deduction to the financial institution in a timely fashion. The employer does not have to file tax forms or make a contribution. No minimum number of participants is required for a payroll deduction IRA plan. The employer is limited to providing information only to employees.

Payroll deduction IRAs do not allow loans as with some employer-sponsored plans. They do allow employees to make withdrawals because they are individual plans. People making early withdrawals before age 59 1/2 are subject to taxes and an additional 10-percent penalty by the IRS.

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If the employer decides the payroll deduction IRA plan no longer meets its needs, it notifies the payroll department to cease making deductions. Employees and financial institutions are notified, but no IRS notice is required. The employees may continue to contribute to their individual retirement plan by working directly with the financial institution.

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A payroll deduction IRA allows an employee to authorize a deduction from his or her paycheck to be deposited into a private IRA. The plans are among the simplest ways for workers to invest for their retirement, American Funds noted.
payroll deduction IRAs, retirement
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2015-32-12
Wednesday, 12 August 2015 01:32 PM
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