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Since their inception, Individual Retirement Accounts have evolved into a number of variations.  IRAs may be set up by individuals for their own behalf or established by employers for benefit of their employees.  Almost anyone who earns income may open an IRA. There are two general types of IRAs that may be established by individuals: “traditional” IRAs (in which contributions may or may not be tax-deductible) and “Roth” IRAs (in which contributions are never deductible). Regardless of the type of IRA established, the tax code limits the total contributions that can be made each year by an individual to all of his or her IRAs (traditional and Roth).

Employers, too, have a variety of IRA alternatives.  Employers may simply contribute to an employee's existing IRA, or establish more formal IRA programs such as Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE plans). In employer-sponsored IRAs the maximum annual contributions may exceed the limits that the tax code places on individual contributions.  These contributions are usually tax-deductible for the employer.

Individual sponsored IRAs

Traditional IRAs

So-called “regular” or “traditional” IRAs, allow individuals to contribute annually to the account.  The contributions are invested and any earnings in the account grow tax-deferred.  Tax-deferred growth in an IRA is one of the prime advantages of these accounts.  Upon retirement, the individual may withdraw funds from the IRA.  Funds distributed from the account are taxable in the year they are withdrawn. In addition, the IRS imposes penalties on most withdrawals prior to age 59½, and requires withdrawals to begin no later than age 70½.

      deductible IRAs

In some cases, contributions to a traditional IRA are tax-deductible.  In effect, before-tax dollars are contributed.  Deductible IRAs offer the owner two tax benefits: an immediate savings on his or her  tax bill in the year of the contribution and tax-deferred growth in the account.  Whether contributions to a traditional IRA qualify for a tax deduction depends on whether the contributor is eligible to participate in another qualified retirement plan and the contributor’s income.  If the contributor is not covered by any other plans, all contributions to his or her traditional IRA are deductible.  For contributors who are covered by another plan, the deductibility depends on their income.    In a deductible IRA, the contributor escapes taxation on the initial contributions and the earnings in account grow tax-deferred, so any funds are fully taxed, as ordinary income, when withdrawn.

     nondeductible IRAs

Persons who are not eligible for a tax deduction may still contribute to a traditional IRA.  While the immediate tax benefit of the deduction is missing, these accounts do offer tax-deferred growth.  Essentially, after-tax dollars are contributed to a tax-deferred account.  As with any traditional IRA, taxes are due when funds are withdrawn. Distributions from non-deductible IRAs represent partial return of principal (which has already been taxed) and earnings (which have not).  Consequently, only the earnings portion of withdrawals from non-deductible IRAs is taxed.

Roth IRAs

Named for the U.S. Senator who introduced the legislation to create them, Roth IRAs are fundamentally different from traditional IRAs.  Roth IRAs offer no immediate tax benefits to the contributor but offer substantial advantages upon withdrawal.  Due to their delayed tax benefits, Roth IRAs have been called “backloaded” IRAs.  No contribution to a Roth IRA is tax-deductible. The earnings in the account grow tax-deferred and all “qualified withdrawals” from a Roth IRA are tax-free.   Only those earning less than $110,000 individually or $160,000 jointly may contribute to a Roth IRA.

Employer sponsored IRAs

As IRAs gained in popularity, Congress expanded the tax code to permit employer-sponsored IRAs as a way to increase the availability of retirement plans.  The alternatives available to employers range from simply contributing to an employee's existing IRA (perhaps through a payroll deduction plan) to more formal arrangements such as SEPs and SIMPLE plans.  Such plans must be for the exclusive benefit of employees, although an employee’s non-working spouse may also be covered. Monies contributed by the employer are tax deductible as a business expense.  The accounts grow tax-deferred.  Employees pay taxes when the funds are withdrawn from the IRA.  In effect, both SEPs and SIMPLE plans use “traditional deductible IRAs” as the funding vehicle — with the employer taking the deduction.  So the rules that apply to “traditional IRAs” apply to these employer sponsored plans as well.  All types of employers may establish these plans, including the self-employed.  The tax code also permits labor unions and employee associations to set up IRAs for their members.


Simplified Employee Pensions allow all employers, regardless of size, to contribute funds to their employees’ IRAs.  Designed as a way for smaller businesses to create a retirement plan without the administrative hassles of other qualified plans, SEPs are easy to establish and do not require the employer to contribute every year.  To maintain the plan's tax status, it must cover virtually all employees and the funding formula may not discriminate in favor of highly-paid employees.  Once contributed to the account, the funds are "100% vested", meaning the employee has full control over the account.


Employers with 100 or fewer employees may set up Savings Incentive Match Plans for Employees (or SIMPLE). Such plans, which may be structured as IRAs or 401ks, allow employees to defer a portion of their income each year into their retirement plan  — and require employers to match employee contributions under specified formulas. SIMPLE IRAs relieve employers of the complex nondiscrimination testing and reporting requirements that apply to other qualified plans.

Other employer sponsored IRA programs

If a SEP or SIMPLE plan does not fit an employer’s needs, the employer can simply contribute to an employee's existing IRA — or establish an individual IRA on behalf of an employee.  Employers may set up IRAs for all employees or on an employee-by-employee basis, as the employer wishes. Unlike SEPs, SIMPLEs and qualified plans, there are no minimum coverage rules for employer-funded IRAs.  

In this type of plan, the employer is subject to the same contribution limit as individual IRAs.  If an employer does not contribute the maximum amount, the individual employee may contribute the difference.  As a practical matter, employers should take care to keep employees informed about how much has been contributed to IRAs on their behalf. This helps prevent employees from inadvertently exceeding their maximum annual IRA contribution limit.  Amounts contributed to the IRA by the employer are taxed as earnings to the  employee.   Employees, however, may take an offsetting deduction for the employer's contributions, if they qualify for an IRA deduction. Any employer-paid contribution is deductible by the employer, as a business expense, regardless of whether it is deductible by the employee.

Or, mployers may set up a payroll deduction IRA program for their employees. In this situation, an employer collects employee IRA contributions by deducting amounts from paychecks of participating employees and transferring the withheld funds to an IRA sponsor.  Payroll deduction programs do not involve employer contributions — the employer simply facilitates the collection of funds on behalf of the employee.  The employee, not the employer, claims any deduction to the contribution to the IRA. (The employer does deduct the employee's salary, from which the contributions are taken, as a business expense.)  As long as such a plan is voluntary, the employer does not select the IRA sponsor or direct investments within the account, or contribute to the account, a payroll deduction IRA is not covered by ERISA .