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 Instead, taxes are paid when the money is withdrawn, including on any earnings.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.