Employer contributed Roth IRA?

[Guest Mimi]

I am a COMPLETE dummy when it comes to IRA's, 401(k)'s, etc....that's why I'm here, I guess. Here's my situation and question:

I work part-time for a lady doing her bookkeeping, keeping up with her affairs and business matters, etc. I only work 12-15 hours a week for her, but she pays me a salary each week and pays all relevant taxes on that salary. She has mentioned that she wants to start putting money back for me for retirement. Another household employee of hers currently has a Roth IRA and told me that this would be the way for me to go as well. We are looking to do something that is tax efficient for both of us (employee and employer). I believe that the maximum that could be put into a Roth IRA for myself is $3000, correct? Under that premise, she wants to put the full $3000 per year into whatever account we set up for me.

My question is...first of all, is a Roth IRA definitely the way to go in this situation? Or is there another type of account that we should go with? Is she even allowed to put the $3000 into a Roth IRA for me?

Also, if she did put this amount into a Roth IRA for me, is that amount taxable to her from a payroll tax standpoint (or any other tax standpoint for that matter)?

I hope that these questions make sense. Please let me know if I need to clarify further. Thank you all in advance for any help you can give me on this!

[John G]

First, the $3,000 annual max (soon to be increased) is only the maximum if you earned income is over $3,000, otherwise your earned income is the maximum.

The Roth option may be reasonable because it is "tidy" - relatively clean and simple. Anyone can fund your Roth, such as parents or grandparents funding a teenagers IRA.

Your employer could fund your Roth as a "gift". It is unusual for an employer to both pay someone and give them a gift, but not completely unheard of. The accountants might want to weigh in on the question of if the IRS might consider the "gift" a bonus and expect taxes all of the payroll taxes to be paid. My experience on that point is limited.

Your employer might not like the "gift" approach as you would not be taking a business expense. There are other retirement plan options for small businesses that may be apply, although they would not have the same tax benefits to you. You might want to post again to clarify if keeping it simple, maximizing the contribution, getting a tax write-off for your employer or some other goals have priority. Her accountant would also be a useful source for discussing options.

[Guest Mimi]

Thank you, John, for your reply. While the benefits to me with a Roth IRA are definitely attractive, I think that the main focus should probably be tax savings for her since she is being so generous in doing this for me.

In that case, would a 401(K) be more beneficial from her standpoint?

Since she is not a company, but rather an individual who employees me, could she even set up a 401(K) for me?

I understand that if she sets up a 401(K) for me, I can still set a Roth IRA up for myself, correct? In that case, would there still be the $3000 limit between BOTH accounts or only for the IRA?

Thanks again for your help! Hopefully, the answers to these final questions will be able to help me make a decision.