Payroll-deduction IRAs Help Employees Save for Retirement

Many employers permit their employees to directly deposit all or a portion of their paychecks into checking or savings accounts. Employers may also permit their employees to contribute to traditional or Roth individual retirement accounts or annuities (IRAs) by direct deposit through payroll deduction. Payroll deduction IRAs are a way for employers to assist their employees in saving for retirement.

Traditional IRAs
Employees who make deductible contributions to traditional IRAs, whether by direct deposit through payroll deduction or otherwise, may be able to adjust their Federal income tax withholding on account of these contributions. By adjusting their withholding, employees may not have to wait until they file their tax return to get the benefit of the tax deduction for their contributions.

Employees can review the instructions on IRS Form W-4 (Employee’s Withholding Allowance Certificate) and the worksheet on the back of that form to see if they are eligible for this withholding adjustment.

Roth IRAs
The introduction of Roth IRAs in 1998 presents an additional opportunity for employee retirement savings. As with traditional IRAs, amounts accumulated under Roth IRAs are exempt from federal income tax. Unlike traditional IRAs, contributions to Roth IRAs are not deductible. However, “qualified” distributions from Roth IRAs are excluded from a taxpayer’s gross income.

Cite:IRS Announcement 99-2, I.R.B. 1999-2, CCH PENSION PLAN GUIDE 17,097P-94.

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