Table of Contents
- What Is an Elective-Deferral Contribution?
- Key Takeaways on Elective-Deferral Contributions
- How Elective-Deferral Contributions Work
- Elective-Deferral Contribution Limits
- Employee and Employer Total Contribution Limits
- What Is the IRS Limit for 401(k) Elective Deferrals?
- Are Elective Deferrals Tax-Deductible?
- Are 401(k) Plans Insured by the FDIC?
- The Bottom Line
What Is an Elective-Deferral Contribution?
Let me explain what an elective-deferral contribution really is. It's a direct deduction from your salary that goes straight into your employer-sponsored retirement plan, like a 401(k). You have to authorize this yourself before any money gets moved—it's not automatic.
These contributions often happen on a pre-tax basis, and the IRS sets strict limits on how much you can put in each year to a qualified plan. You might also hear this called a salary-deferral or salary-reduction contribution; it's all the same thing.
Key Takeaways on Elective-Deferral Contributions
At its core, this is about taking part of your paycheck and funneling it into a plan like a 401(k) or 403(b). If your employer permits, you can do this pre-tax or after-tax. Remember, the IRS caps your contributions, so for 2024, if you're under 50, you can defer up to $23,000— that's up from $22,500 in 2023. If you're 50 or older, add $7,500 in catch-up contributions, bringing your total to $30,500 in 2024 or $30,000 in 2023.
How Elective-Deferral Contributions Work
When you make these contributions to a traditional 401(k), they're pre-tax, which means they lower your taxable income right away. Take someone earning $40,000 who defers $100 a month—that's $1,200 yearly, so their taxable income drops to $38,800. You get the tax break now, but withdrawals in retirement get taxed at your then-current rate.
There are rules on withdrawals: pull money out before 59½, and you might face a 10% penalty, plus possible state taxes, unless it's a qualified hardship. Some plans offer Roth 401(k) options, where you contribute after-tax dollars—taxed upfront, but you can withdraw contributions (not earnings) tax-free after 59½.
Elective-Deferral Contribution Limits
The IRS doesn't let you contribute unlimited amounts. For employees under 50, the limit is $23,000 in 2024 and $22,500 in 2023, applying to both traditional and Roth 401(k)s. If you're 50 or older, tack on that $7,500 catch-up for totals of $30,500 in 2024 and $30,000 in 2023. Even with multiple accounts, your combined deferrals can't exceed these caps.
Employee and Employer Total Contribution Limits
These limits are just for your elective deferrals—they don't cover employer matches, nonelective contributions, or forfeitures. The overall cap for all sources combined is the lesser of 100% of your compensation or $69,000 in 2024 ($76,500 with catch-up) and $66,000 in 2023 ($73,500 with catch-up).
What Is the IRS Limit for 401(k) Elective Deferrals?
Simply put, it's the amount you choose to deduct from your pay into the plan. For 2024, that's $23,000 if under 50, or $30,500 with catch-up. In 2023, it's $22,500 or $30,000. Employer matches don't count toward your personal limit, but the total can't top 100% of your salary or those annual figures I mentioned.
Are Elective Deferrals Tax-Deductible?
You don't claim a deduction on your tax return for these contributions, but they still cut your tax bill by reducing your taxable income upfront with pre-tax dollars.
Are 401(k) Plans Insured by the FDIC?
Most 401(k) funds aren't FDIC-insured, but some accounts might qualify if you direct the investments in certain ways.
The Bottom Line
Retirement saving is crucial, so if your job offers a 401(k), use it. Contribute pre-tax to lower your taxes, and if there's a match, that's essentially free money. Stick to the limits, or you'll face corrections and penalties.
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