An elective deferral refers to the portion of an employee's pre-tax earnings that they choose to contribute to their 401(k) retirement plan. These contributions are deducted directly from the employee's paycheck and are not subject to income tax at the time of contribution.
Elective deferrals are "elective" because the employee chooses the amount they wish to contribute, up to a maximum limit set by the Internal Revenue Service (IRS). This limit was $19,500 per year for individuals under 50 years old, and $26,000 for those 50 or older (including a catch-up contribution of $6,500).
The advantage of elective deferrals is the tax benefit. Since these contributions are made with pre-tax dollars, they lower the employee's taxable income for the year, potentially placing them in a lower tax bracket. Additionally, the money in the 401(k) grows tax-free until it is withdrawn during retirement when it is taxed as ordinary income.
Remember, tax laws and regulations can change and the information given here may be outdated. It is always recommended to consult with a tax advisor or financial planner to understand the current rules and how they apply to individual situations.
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