You’d like to offer some type of retirement plan. You’ve looked at several options including a 401(k) plan. You just aren’t sure which option to choose. Have you considered a payroll deduction IRA or a Simple IRA?
Payroll Deduction IRA
This IRA is the simplest way to offer a retirement plan. The employee establishes a traditional or Roth IRA and authorizes a payroll deduction for a specified amount. As the employer, your responsibility is to send the authorized deduction to the financial institution. At year-end, you report the deducted amount on the employee’s W-2. That’s it.
It is best to offer the payroll deduction IRA option to all employees, although there is no legal requirement to do so. By opening the payroll deduction IRA to all employees, you eliminate any conflicts about who is and isn’t given access to the program.
A simple IRA works like a 401(k) plan in a lot of ways. Contributions are pre-tax and are tax-deferred until retirement. A 10% early withdrawal penalty does apply if the money is withdrawn before age 59 1/2. The simple IRA typically offers a variety of mutual funds, much like a 401(k). The primary difference is the employer matching incentive that is built into the plan.
The employer must match the employee’s contribution dollar for dollar up to 3% of the employee’s salary. At a minimum, the employer must match 1% of the employee’s salary. Employers have the option of contributing a flat 2% of an employee’s salary, whether the employee participates in the plan or not.
Choosing the Right IRA
Choosing between a payroll deduction or simple IRA depends on how much you, as the employer, want to invest in an employee’s retirement. With a payroll deduction IRA, you invest very little time or money into the program; however, the simple IRA offers a more robust retirement plan for your employees. Regardless of which option you choose, it is possible to provide a retirement plan no matter what the size of your business, and we can help! Contact us today to learn more!