If you are looking for a really easy way to help you or your employees save for retirement, the payroll deduction IRA is the way to go. With the payroll deduction IRA there is no financial obligation to contribute to your employee’s retirement. Also there is very little administrative requirement with this plan. Only employees make contributions with this plan. Any size business (even sole owners) can use this.

How the payroll deduction IRA works

The employee establishes an IRA (either a Traditional or a Roth IRA) with a financial institution and authorizes a payroll deduction for the IRA. The employee notifies the employer who then deducts the agreed amount from each paycheck and deposits it to the financial institution. If this option is available to one employee, it must be made available to all employees.

Example

George has 3 employees and does not want to be financially responsible for their retirement. He learns of the payroll deduction IRA and decides to offer it to his employees. Of all 3 employees, only Lucy decides to take advantage of this. Lucy establishes a traditional IRA with her local bank and makes George aware of it. Lucy has $20 taken from her weekly paycheck which makes $1,040 ($20 * 52) for the year. At the end of the year, George will report the wages she earned on her W-2. Lucy will have to add the $1,040 she contributed to any other contributions she made during the year. She then uses the total amount to determine any IRA deduction or savers tax credit due.

This plan is great as the employee decides how much and when to contribute. Very little responsibilities are delegated to the employer. By offering this plan employees at least have an option to save for retirement.

If you are sole owner, it is a great way to contribute to your retirement without the administrative expenses and tasks required in much complex plans. The downside is your deductions in the payroll deduction IRA are smaller than other business retirement plans. For instance the maximum contribution for the year 2014 in a traditional IRA was. $5,500 ($6,500 for 50 or older). Compare this to $52,000 for the 401K

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