Payroll Deduction IRAs | Capital Group

Payroll Deduction IRAs

Payroll deduction IRAs may be the simplest way workers can save for retirement. Employees set up a traditional or Roth IRA on their own, and then let the employer know how much they’d like to contribute from each paycheck.

Any employer or sole proprietor can set up a payroll deduction IRA program. Here are the basics:

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 2020 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 the $10 setup fee and a $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 Instead, taxes are paid when the money is withdrawn, including on any earnings. This deferred tax leaves more money in an employee’s pocket — money to invest, save or spend.
  • 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, any earnings are tax- and penalty-free for qualified distributions.*

* Withdrawals from Roth accounts are tax- and penalty-free if the account was established at least 5 years before, and if the owner is at least 59½ years old, disabled or deceased. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.

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 or penalties. 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 have no fiduciary liability because the retirement plan is not employer-sponsored.

Employees can establish an IRA with American Funds or another financial institution, and choose any of the investments offered.

Convenience – A single investment provides a funds of funds portfolio of actively managed American Funds aligned with an investor’s time horizon. A carefully monitored retirement glide path means no more manual reallocation for the investor.

Objective-focused – With objectives like growth, income and preservation, these funds of funds offer diversification and control in a single investment.

Customized — Investors can build an investment portfolio of American Funds to meet their specific preferences and needs.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.