The Payroll Deducted IRA: An Easy Retirement Plan Option for Small Businesses | Millennium Trust Company

The Payroll Deducted IRA: An Easy Retirement Plan Option for Small Businesses

November 23, 2022
By Millennium Trust

You may feel like your company is too new, or too small, to offer a retirement plan benefit like a 401(k) or SIMPLE IRA plan right now. But there is another option, one with minimal administrative responsibilities or expense: a Payroll Deducted IRA program.

How Payroll Deducted IRAs work

A Payroll Deducted IRA program is an affordable way for businesses of all sizes to offer employees an opportunity to save for retirement and is as easy to set up as it is to maintain. You simply choose an IRA provider for your program.

Your employees open an IRA or Roth IRA, based on eligibility and personal choice, in their own name at the institution and authorize deposit of payroll deductions. Each pay period, you withhold the amount of the authorized payroll deduction and transfer the money to the financial institution on your employees’ behalf. The account administration, reporting and investment-related activities are the institution’s responsibility, not yours.

Because your involvement is minimal, the plan is not considered an employer retirement plan under Federal Law, relieving you of reporting responsibilities.

More Payroll Deducted IRA considerations

Here are a few other things you should know before choosing to offer employees a Payroll Deducted IRA program:

  • There are no employer contributions allowed in a Payroll Deducted IRA program. Your involvement in the program is limited to collecting employee authorized contributions and transmitting them to the IRA provider on the employees’ behalf.
  • Unlike an employer-sponsored retirement plan, the limits on your employees’ contributions are much lower. For example, employees can only contribute up to $6,500 to either a traditional IRA or Roth IRA in 2023 through this program. (The “catch-up” contribution for account owners over age 50 is $1,000, which boosts the limit to $7,500). The limits are higher for 401(k) and SIMPLE IRA plans.
  • You are not subject to any plan-level filing or compliance requirements with a Payroll Deducted IRA.

Helping employees save for their retirement

According to Bureau of Labor Statistics 2020 data, 78% of American workers with access to a workplace retirement savings plan participate – however, almost half of private sector employees (57 million) lack access to a workplace retirement savings plan. While these individuals can set up an IRA on their own, most do not. By offering a Payroll Deducted IRA program, you can help employees regularly contribute to their retirement savings and improve their retirement readiness.

To determine if a Payroll Deducted IRA is right for your business and employees or if another retirement saving option might be more suitable, try our Retirement Savings Selector Tool.

Try our Selector Tool

The material in this article is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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