What Is an Elective-Deferral Contribution?

An elective-deferral contribution is made directly from an employee's salary to their employer-sponsored retirement plan, such as a 401(k). With a 401(k) deferral, the employee must authorize the ꦗtransaction before the con൩tribution can be deducted.

Elective deferrals can be made on a pre-tax basis. The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) establishes limits on how much an employee can contribute to a 澳洲幸运5官方开奖结果体彩网:qualified retirement plan. 

An elective-deferral contribution is also known as a salary-deferral contribution or salary-reduction contribution.

How Elective-Deferral Contributions Work

Elective-deferral contributions to traditional 401(k) plans are made on a pre-tax or 澳洲幸运5官方开奖结果体彩网:tax-deferred basis, effectively reducing an employee's 澳洲幸运5官方开奖结果体彩网:taxable income. Suppose an individual who earns $40,000 a year decides to make a 401(k) deferral of $100 per month. These deferrals total $1,200 per year. As a result, the 𝄹employee's pay is taxed at $38,800 that year instead of💧 $40,000. 

Since there's a tax break up front, any distributions are taxed at the 澳洲幸运5官方开奖结果体彩网:income tax rate for the retiree at the time of 澳洲幸运5官方开奖结果体彩网:withdrawal. Several restrictions apply as to when and under what circumstances an employee can make withdrawals from an employer-sponsored retirement plan. For example, an additional 10% penalty tax may apply if an individual makes a withdrawal before age 59½—unless the employee meets the conditions for a 澳洲幸运5官方开奖结果体彩网:hardship withdrawal. State and local taxes may also be assessed for early withdrawals.

Some employers allow workers to contribute toward 澳洲幸运5官方开奖结果体彩网:Roth 401(k) plans. Contributions made to these plans are made on an 澳洲幸运5官方开奖结果体彩网:after-tax basis. This means that the funds are taxed before they are deposited into the 澳洲幸运5官方开奖结果体彩网:retirement plan.

Elective-Deferral Contribution Limits

The IRS has limits on how much money can be contributed to an employee's qualified retirement plan.

Employee Contribution Limit

Individuals under the age of 50 can contribute up to $23,000 in 2024 ($22,500 in 2023) into a 401(k). Those age 50 or older can make catch-up contributions of an additional $7,500 for 2023 and 2024 for a total of $30,500 for 2024 and $30,000 for 2023. These rules apply to Roth 401(k)s, as well.

IRS rules also apply if you have multiple 401(k) accounts. This means if a person under 50 invests in a traditional plan and a Roth plan, they can make 401(k) deferrals of up to $23,000 for 2024 and $22,500 in 2023.

Employee and Employer Total Contribution Limit

The rules stated earlier apply only to elective-deferral contributions. They do not apply to the 澳洲幸运5官方开奖结果体彩网:matching contributions from an employer, 澳洲幸运5官方开奖结果体彩网:nonelective employee contributions, or any allocations of forfeitures. The IRS limits the total amount that can be contributed to an employee's retirement plan from all sources, including the employer's matching and the employee's contributions.

The total contributions to an employee's retirement plan from both the employee and employer cannot exceed the lesser of:

• 100% of the participant's compensation
  
• $69,000 or $76,500, including 澳洲幸运5官方开奖结果体彩网:catch-up contributions for those age 50 or older in 2024
• $66,000 or $73,500, including catch-up contributions for those age 50 or older in 2023

The Bottom Line

Saving for retirement is an important part of anyone's financial plan. If you can, make sure you take advantage of an employer-sponsored plan, such as a 401(k). These plans allow you to contribute pre-tax dollars, which also lowers your annual taxable income. This means you may even be able to lower your tax liability. If your employer provides a match, it sweetens the pot even more because it means free money in your account. Keep in mind that there are limits to how much you can contribute. If you go over these limits, you will have to correct them—and you may face penalties.