Small businesses have many options for retirement savings accounts but they can be time consuming to set up and maintain. The simplest option for the small business or self employed with one or more employees is the payroll deduction IRA. The employees make contributions via payroll deduction however; the employer does not match the amount in the IRA. The employer’s role is to transmit the contributions for the employee directly to the IRA program with a bank, insurance company or other financial institution. As long as the employer keeps their involvement to a minimum, this will not be treated as a retirement plan under federal law and they will not have to submit annual reports to the government.
The IRA contribution limit for 2011 is $5000. For employees 50 or older, the contribution limit is $6000 per year. The contributions are 100% vested immediately. Early withdrawals (before age 59 ½) are subject to the 10% penalty in addition to income tax on the amount.
The employee must determine the amount that they would like to contribute. The employee must also select a Roth or Traditional IRA. The Roth IRA contributions are after tax, but the investments grow tax free. The traditional IRA contributions may be deductible on the employees’ tax return based on their adjusted gross income and other factors. Employees should consult a tax advisor prior to choosing an IRA. If the business owner is not an employee of their own business, they cannot set up payroll deductions but can still set up an IRA for themselves. They need to determine the amount to contribute, and establish an IRA. This is the best option for the self-employed because retirement plans are usually overlooked.