Can an Employer Contribute to an Employee's Roth IRA?

Many employers try to help their employees save for retirement by setting up special retirement plans for them. These plans can include employer profit sharing and matching contributions, but the costs of setting up a 401(k) or other employer-sponsored retirement plan can be prohibitive. One attractive alternative is for the employer to contribute to an employee Roth IRA, but setting that up is more complicated than just writing a check. Let's review some of the steps necessary to have money go from your employer into your Roth IRA.

Payroll deduction and Roth IRAs
Historically, there was little opportunity for employers to get involved in their employees' IRAs. Employer-sponsored plans still are the primary vehicle for companies to help their workers save for retirement, and decisions regarding IRAs still belong exclusively to each individual worker.

However, as electronic payments have evolved, laws have changed to make it easier for individuals to save in IRAs. One such provision allows participating employers to allow their employees to arrange for payroll deductions to go directly to an IRA. Whether that IRA is a traditional or Roth IRA depends entirely on the worker, but the payroll deduction makes sure that whatever amount the employee states gets contributed into the retirement account.

Limits on Roth IRAs
When you consider employer contributions to Roth IRAs, the main obstacle is that under payroll deduction, it's always up to the employee to decide where paycheck funds go. The employer can increase an employee's wages, but it can't force the employee to set that money aside in a Roth IRA or any other retirement account.

Moreover, the employer also needs to understand that even with the payroll deduction method, any limitations on the employee's ability to contribute to a Roth IRA are still in place. Therefore, the maximum limit of $5,500 annually for those under 50 or $6,500 for those 50 or older applies. Moreover, if the employee's income exceeds certain limits, then Roth IRA contribution might not be possible at all.

An alternative
If the employer wants to provide a Roth-style alternative to a Roth IRA, then one option is to offer a Roth account within its 401(k) plan. These accounts use after-tax dollars in the same way a Roth IRA does, and withdrawals from the account are tax-free.

For employers that don't offer 401(k)s, however, looking at the payroll deduction option is worth considering. It requires good faith between employers and employees, but done correctly, it can save a bundle in administrative fees while still achieving similar results as a standard employer plan.

Still have questions? Our IRA Center can help you figure out what kind of IRA is best for you.

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