What is an 'Elective-Deferral Contribution'

An elective-deferral contribution is made directly from an employee's salary to his or her employer-sponsored retirement plan such as a 401(k) or 403(b) plan. The employee must authorize the transaction before the contribution can be deducted. Elective-deferrals can be made on a pre-tax or after-tax basis if an employer allows. The IRS will set different limits on how much an employee may defer into qualified retirement plans depending on different circumstances. 

BREAKING DOWN 'Elective-Deferral Contribution'

Elective-deferral contributions made into traditional 401(k) plans are made on a pre-tax or tax-deferred basis, effectively reducing an employee's taxable income. For example, suppose an individual making $40,000 a year decides to contribute $100 per month into his 401(k). These deferrals amount to a total of $1,200 per year. As a result, this individual's pay is taxed at $38,000 that year instead of $40,000. But, because these contributions were tax-deferred, the employee would owe taxes on any amount withdrawn from the retirement plans. Withdrawals are called distributions. Distributions are taxed at the income rate the individual falls into when the funds are withdrawn.

Several restrictions apply when and under what circumstances an employee can make withdrawals from employer-sponsored retirement plans. For example, an additional 10% penalty tax may apply if an individual makes a withdrawal before age 59.5—assuming the employee meets the conditions that allow him or her to take an early distribution. Furthermore, state and local taxes may be assessed to early withdrawals.

Some employers will allow workers to contribute toward Roth 401(k) plans. Contributions made to these plans are made on an after tax-basis. After tax-basis means the funds are taxed before they were deposited into the retirement plan. Employees may withdraw deferrals tax-free if they make them after they turn age 59.5. 

Elective-deferral Withdrawal Limits 

Every year, the IRS sets rules on how much income employees can defer toward a qualified retirement plan. For 2018, individuals under the age of 50 can contribute up to $18,500 into a 401(k). Those aged 50 and above can make catch-up contributions of an additional $6,000 for a total of $24,500. These rules apply to Roth 401(k)s as well. 

IRS rules also apply if you have multiple 401(k) accounts. Say a person under age 50 invests in a traditional 401(k) and a Roth 401(k) plan. That person can make elective-deferral contributions of up to $18,500 in 2018. However, these rules apply only to elective-deferral contributions. They do not apply to matching contributions from an employer, non-elective employee contributions, or any allocations of forfeitures.

The total contribution limit from all of these sources for 2018 is $55,000 for those savers ages 50 or younger. The total contribution limit for those aged at least 50 is $61,000 for 2018. An elective-deferral contribution is also known as a "salary-deferral" or "salary-reduction" contribution.

RELATED TERMS
  1. Matching Contribution

    A matching contribution is a type of contribution an employer ...
  2. 403(b) Plan

    A 403(b) is a retirement plan for certain employees of public ...
  3. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  4. Pretax Contribution

    A pre-tax contribution is any contribution made to a designated ...
  5. Retirement Contribution

    A retirement contribution is a payment into to a retirement plan, ...
  6. Roth Option

    A Roth Option is available within some employer-sponsored qualified ...
Related Articles
  1. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  2. Retirement

    It’s Never Too Late to Contribute to Your 401(k)

    Find out why it is never the wrong time to start contributing to a 401(k), even in your late 30s, 40s or 50s; discover how to maximize your savings at any age.
  3. Investing

    Understanding 401(k)s and All Their Benefits

    A quick guide to understanding 401(k) advantages, from tax savings to shelter from creditors.
  4. Retirement

    3 Reasons To Use an Employer-Sponsored Retirement Plan

    If you aren't participating in your employer-sponsored retirement plan, you're missing out! Learn the benefits.
  5. Retirement

    How Yearly Taxes on 401(k) Accounts Work

    Learn how your contributions to traditional or Roth 401(k) accounts are taxed, either in the year of contributions or at withdrawal, depending on the type.
  6. Retirement

    5 Key Features of 401(k) Plans

    Understanding your 401(k) options and making the right decisions can have a big impact on your retirement savings.
  7. Financial Advisor

    457 plans versus 403(b) plans: A comparison

    There's plenty of advice about 401(k) plans, but what about 457 and 403(b) plans? Find out what these plans are about and the differences between them.
  8. Retirement

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center