An IRA, as its full name indicates, is an individual retirement account. This means that you, and not your employer, typically manage your contributions, which gives you more flexibility. You decide when to deposit money in your account, and you decide how much -- within the IRS limits -- to contribute. Certain specialized IRAs, however, work differently, and some of them do involve payroll deductions.
Traditional and Roth IRAs
With a traditional IRA, you make your own contributions and you also handle the tax deduction. When you figure out your adjusted gross income on the front of your 1040, part of the adjustment involves subtracting IRA withdrawals from your gross income. If you've made non-deductible IRA contributions, you don't deduct them. Use Form 8606 to report non-deductible contributions. This also shows the IRS that you've claimed the right amount for your IRA deduction. With a Roth IRA, you likewise make your own contributions, but you make them with after-tax dollars, so you don't get an adjustment to your taxable income.
Payroll Deduction IRA
Payroll deduction IRAs give employers a way to help you save for retirement without the expense or demands of running a 401(k) plan. Your employer sets up the plan with a bank or other company. You decide if, and how much, you want to contribute, then your employer deducts the right amount from your paychecks. Once the plan's in place, you don't have to think about it -- contributions are automatic.
A SIMPLE IRA is a specialized, employer-created plan that also allows you to contribute through payroll deductions. The plan comes in two flavors. In one, you contribute money and your employer then makes a matching contribution. In the other, you don't contribute anything, but your boss makes a contribution just the same. Employers don't have to make the IRS filings a 401(k) requires which makes SIMPLE IRA plans attractive for small companies.
A SEP-IRA is another specialized IRA set up by employers, but it doesn't typically use payroll deductions. Your employer contributes to this type of IRA account instead, but the amount she deposits each year is flexible. If she has the money to spare, she can put in extra; if it's a lean year, she doesn't have to contribute at all. However, employers do have to contribute to employees' accounts equally -- if the managers get a 4 percent contribution, for example, so does everyone else.
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