Elective Deferrals: A Comprehensive Guide to Their Legal Meaning

Q: Are there limits on how much I can defer?

Yes, the IRS sets annual contribution limits for elective deferrals, which can vary based on your age and the type of retirement plan.

Q: What is the difference between elective deferrals and Roth contributions?

Elective deferrals are typically made pre-tax, while Roth contributions are made after taxes, allowing for tax-free withdrawals in retirement.

Definition & Meaning

Elective deferrals refer to the amounts that employees choose to contribute to their retirement plans, such as 401(k) or 403(b) plans. These contributions are made at the employee's discretion and are generally excluded from their gross income, except for designated Roth contributions. This means that employees can save for retirement while reducing their taxable income for the year they make the contributions.

Table of content

Legal Use & context

Elective deferrals are primarily used in the context of retirement planning and tax law. They are relevant in various legal areas, including employment law and tax law. Employees often utilize forms related to retirement plans to designate their elective deferrals. Users can manage their retirement contributions using legal templates available through resources like US Legal Forms, which are drafted by qualified attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: An employee decides to contribute five percent of their salary to their employer's 401(k) plan. This amount is deducted from their paycheck before taxes, reducing their taxable income for that year.

Example 2: An employee opts to make Roth contributions to their 403(b) plan, meaning they pay taxes on those contributions now, but their withdrawals in retirement will be tax-free. (hypothetical example)

Relevant laws & statutes

Elective deferrals are governed by federal tax law, particularly under Internal Revenue Code Section 402. This section outlines the tax implications of elective deferrals and sets limits on how much can be deferred each year.

State-by-state differences

State	Notes
California	State tax treatment of elective deferrals may differ from federal treatment.
New York	Similar to federal rules, but local tax implications may vary.

This is not a complete list. State laws vary, and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition	Difference
Roth Contributions	Contributions made after taxes that allow for tax-free withdrawals in retirement.	Unlike elective deferrals, Roth contributions are taxed upfront.
Employer Match	Additional contributions made by an employer based on employee contributions.	Employer matches are not elective deferrals; they are additional benefits provided by the employer.

Common misunderstandings

What to do if this term applies to you

If you are considering making elective deferrals to your retirement plan, review your employer's plan options and contribution limits. You may want to consult with a financial advisor or tax professional to ensure you are maximizing your benefits. Additionally, explore US Legal Forms for templates that can help you manage your retirement contributions effectively.

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Quick facts

Typical contribution limits for 401(k) plans: $20,500 for individuals under 50 (as of 2022).
Elective deferrals are generally pre-tax, reducing current taxable income.
Roth contributions allow for tax-free withdrawals in retirement.

Key takeaways

Frequently asked questions

What are elective deferrals?

Elective deferrals are amounts that employees choose to contribute to their retirement plans, which are generally excluded from their taxable income.