how elective deferral contributions work
elective deferral contributions to traditional 401 k plans are made on a pre tax or tax deferred basis effectively reducing an employee s taxable income 4 suppose an individual who earns 40 000 a year decides to contribute 100 per month to their 401 k these deferrals total 1 200 per year as a result the employee s pay is taxed at 38 800 that year instead of 40 000 since there s a tax deduction upfront any distributions are taxed at the income tax rate for the retiree at the time of withdrawal several restrictions apply as to when and under what circumstances an employee can make withdrawals from an employer sponsored retirement plan for example an additional 10 penalty tax may apply if an individual makes a withdrawal before age 59 assuming the employee meets the conditions that allow him or her to take an early distribution state and local taxes may also be assessed for early withdrawals 5some employers 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 are deposited into the retirement plan since there s no pre tax benefit with roth 401 k s employees can withdraw deferrals tax free as long as they re over the age of 59 6unlike roth iras roth 401 k s are not subject to rmds during the owner s lifetime 7elective deferral contribution limitsthe irs has limits on how much money can be contributed to an employee s qualified retirement plan 2individuals under the age of 50 can contribute up to 22 500 in 2023 and 23 000 in 2024 into a 401 k those aged 50 and above can make catch up contributions of an additional 7 500 for 2023 and 2024 for a total of 30 000 for 2023 and 30 500 for 2024 these rules apply to roth 401 k s as well 2irs rules also apply if you have multiple 401 k accounts this means if a person under 50 invests in a traditional 401 k and a roth 401 k plan they can make elective deferral contributions of up to 22 500 for 2023 and 23 000 in 2024 3the rules stated earlier apply only to elective deferral contributions they do not apply to the matching contributions from an employer nonelective employee contributions or any allocations of forfeitures the irs limits the total amount that can be contributed to an employee s retirement plan from all sources including the employer s matching and the employee s contributions 8the total contributions to an employee s retirement plan from both the employee and employer cannot exceed the lesser of 