Can Roth IRA contributions be offered as a benefit?

The topic of this article is whether or not Roth IRA contributions can be offered as a benefit to your employees. This topic is especially pertinent today, as more and more people are exploring different options of saving for their retirement. Social Security is not a sure thing, and even if it were, the money that it gives you is not nearly enough to live on in any sort of humane way. More and more options for saving for your retirement are available, and sometimes it can be incredibly confusing to both employees and employers.

First let's go over what exactly a Roth IRA is. For a long time, lots of people have counted on traditional IRAs to help them plan and save for their retirement. But Roth IRAs actually might be a better way to go. This is why. A Roth IRA lets you possibly receive tax-free distributions of your retirement funds if you choose to make your contributions now nondeductible. Contributions will be nondeductible no matter what your income level is, or whether or not you participate in a retirement plan that is sponsored by your company.

So how do you know if you're eligible for a Roth IRA? If you are single and you have an MAGI (modified adjusted gross income) that is more than $110,000 or if you are married, filing jointly, with an MAGI at more than $150,000, you are not eligible for a Roth IRA. You can't contribute more than $4,000 a year (at least in 2006-check for adjustments to this number) to your IRAs, whether you have traditional, Roth, or a combination of the two. If your MAGI is between $95,000 and $100,000 for singles, or between married couples jointly filing between $150,000 and $160,000, the cap on the contribution limit will begin to lower. If you are over 50, you can make catch-up contributions to the tune of $1,000 per year (but that number is included in the $4,000 limit). Your contributions to your Roth IRA will never be tax deductible. However, distributions are free from federal income tax. There are several requirements that you must meet to have your distributions qualify. You have to be at least 59 ½. Your withdrawal is made to your estate, to a beneficiary, or as a result of your death. You are permanently disabled. You purchase a house for the first time. If you withdraw before you are 59 ½, then you will be subject to an early withdrawal tax.

A majority of small business owners do not invest in a retirement plan either for themselves or for their employees. This is a big mistake. Companies that offer retirement plan benefits have happier employees, they can keep them longer, and for yourself, it ensures that you have enough money to retire. You might not want to still be running your carpet cleaning business when you're 80 because you don't have enough money to quit.

Since a Roth IRA is an individual retirement plan, contributions that are made by the company to the Roth IRA cannot be counted as a benefit. However, the 2001 Economic Growth and Tax Relief Reconciliation Act gives a tax credit to small businesses that start retirement plans, including a 401(k), a SIMPLE plan, or Simplified Employee Pension plan. The credit is 50% of the first $1,000 that you spend on qualified start up costs. You must be employed to start a Roth IRA, but that Roth IRA is not your business-offered retirement plan. Probably your best idea is to have both a Roth IRA and a business offered retirement plan so that you can make sure that you are adequately covered for your retirement.

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Categories: Employee Benefits,

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