FinanceUnderstanding Elective Deferral Contributions to Retirement Plans
Elective deferral contributions are direct payroll deductions employees make into their employer-sponsored retirement accounts, such as 401(k)s. These contributions can be made on a pre-tax or after-tax (Roth) basis, reducing current taxable income. The IRS sets annual limits on these contributions, with higher limits for individuals aged 50 and older to encourage retirement savings. These contributions, combined with employer contributions, are crucial for a secure financial future.