Payroll deduction IRAs are an easy, no-cost way for small-business owners to help their employees save for retirement and take advantage of American Funds’ quality investment options and exceptional service.
Employers who set up payroll deduction IRAs must allow all employees to participate. There are no service-length requirements. Employees are responsible for setting up a traditional or Roth IRA and must meet IRA eligibility requirements.
Employees determine how much of their paychecks they want to contribute to their IRAs. The 2019 contribution limit for IRAs is $6,000, or $7,000 for investors age 50 or older. Employer contributions are not allowed.
- No cost to employers.
- Employees pay $10 setup fee and $10 annual maintenance fee.
Employees who set up a payroll deduction IRA benefit from all the tax advantages offered by IRAs.
- Traditional IRA contributions are made before taxes are deducted, which means that income taxes are not paid at the time of investment. Instead, taxes are paid when the money is withdrawn, including on any earnings.
- Roth IRA contributions are made with money that has been taxed. Money that’s been taxed won’t be taxed when employees withdraw it. Additionally, earnings are tax- and penalty-free for qualified distributions.*
Payroll deduction IRA distributions follow traditional and Roth IRA distribution rules.
- Traditional IRA — Distributions are taxable, but can be taken without penalty after age 59½. Distributions before age 59½ are subject to a 10% early withdrawal penalty, although exceptions may apply, such as for periodic payments, withdrawals for disability, medical bills or a first-home purchase.
- Roth IRA — Distributions up to the amount contributed can be made at any time without taxes and penalty. Distributions from earnings are tax- and penalty-free if the first Roth contribution was made at least 5 years before and the investor is at least 59½, is purchasing a first home, or is disabled or deceased. Otherwise, taxes and penalties may apply.
- Contributions are automatically deducted from employee paychecks.
- There are no IRS forms to complete.
- The program can be discontinued at any time without penalty.
- Employers don’t have any fiduciary liability because it’s not an employer-sponsored retirement plan.
Employees can establish an IRA with American Funds or another financial institution, and choose any of the investments offered.