Tax-Deferred Contribution

Tax-Deferred Contribution

A contribution to a retirement plan on which the contributor does not pay taxes until a later date. One reduces one's taxable income by the amount of the tax-deferred contributions, shielding those contributions from taxation. However, one eventually pays taxes on these contributions when one begins to make withdrawals from the retirement plan. Those contributions (and their investment income) are taxed as ordinary income upon withdrawal. One makes tax-deferred contributions to reduce one's tax liability in the near term in hopes that one's income (and therefore one's tax liability) will be lower after retirement.
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For the self-employed individual, a SEP permits a maximum tax-deferred contribution of $55,000 per person in 2018, which is consistent with an individual 401(k) plan (not including the $6,000 catch-up contribution available to 401(k) plan participants who have attained age 50).
The details of the GOP plan haven't been released yet, but The New York Times reported that Republicans are talking about cutting the annual, tax-deferred contribution from the current $18,000 per year for people under 50 ($24,000 for people 50 or older) to a measly $2,000 a year.
(1) Tax-deferred contribution levels are significantly higher than the $5,000 (in 2009) limit for traditional and Roth IRAs (see Chapter 6).
As an example, Falconer said the maximum tax-deferred contribution to a 401(k) is $10,500.
Making tax-deferred contributions is one of the best ways to save.
401(k) accounts were opened in my name at TIAA/CREF and Vanguard, into which I made periodic, tax-deferred contributions. With this type of plan, I vested immediately in that the money contributed to the accounts belonged to me.
Beyond that level, decide whether you wish to make unmatched tax-deferred contributions to your traditional 401 (k) or similar plans.
Plan sponsors may pay benefits out of operating cash, or they may set aside assets in a rabbi trust--an irrevocable trust in which tax-deferred contributions are invested--and buy an asset that will track what account balances are doing.
Catch-up contributions are additional tax-deferred contributions and are separate from regular TSP contributions.
Even though both companies have earned $200,000 (IBWRC), factoring in retirement contributions produces some real differences in L's and H's taxable income if both taxpayers have a solo 401(k) plan in place and maximize their tax-deferred contributions. With $15,500 in wages, L can contribute only $3,875 (25% of $15,500) for the employer portion of his solo 401(k) and $15,500 for the employee component if he wishes to maximize his retirement contributions.
Fortunately, a 401(k) look-alike plan allows executives to overcome this discrimination by permitting tax-deferred contributions to a nonqualified retirement plan.