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Employer-Sponsored IRAs: A Retirement Plan with Unique Advantages

If a business owner is considering starting a retirement plan for himself and his employees, he may want to consider an employer-sponsored IRA. While employer-sponsored IRAs are not very well known, even to many tax pros and CPAs, they offer some unique advantages from other employer retirement plans.

Basically an employer-sponsored IRA is an arrangement where the employer makes an IRA contribution for his employees. The employer can choose to make that contribution into an IRA or Roth IRA. The employer can also choose the employees for which he or she wants to make that contribution. Unlike other employer retirement plans such as a 401(k), SEP, or SIMPLE, the employer has complete flexibility over which employees will receive an IRA contribution that year. The employer has complete discretion.

The employer would make the deposit into an IRA for each employee who is getting a contribution. All the IRA rules apply, such as the $5,500 limit for 2013 (or $6,500 if the employee is age 50 or older), the age 70 ½ rule for IRAs, and the income rules for Roth IRAs. For example, if your employer wants to make a Roth IRA contribution for you, your income (modified adjusted gross income) must be below $178,000 if you’re married filing jointly, or $112,000 if you’re single, to receive a full Roth IRA contribution.

Employer-sponsored IRA contributions are considered wages, so the contribution is taxable to you. If your employer makes an IRA contribution for you, they should tell you so that you don’t exceed the IRA limit for the year if you also plan on making an IRA contribution for yourself. If the employer contribution was made into an IRA, you might be eligible for a tax deduction. If the employer contribution is made into a Roth IRA, it can’t be deducted.

-By Joe Cicchinelli and Jared Trexler


Great info, thanks. Could an employer have both a SEP and employer sponsored IRA for the same employee?

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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.