Tax-Deferred Contribution

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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.
References in periodicals archive ?
GOP lawmakers have been considering changes to the 401(k) structure, such as limiting the amount of tax-deferred contributions employees can make, as a way to help finance tax cuts.
Without this safe harbor, low plan participation among middleand lower-income workers might limit allowable tax-deferred contributions from key employees of the sponsoring company, including the business owner or owners.
Catch-up contributions are additional tax-deferred contributions and are separate from regular TSP contributions.
A solo or self-employed 401(k) combines a profit-sharing plan with a 401(k) plan and allows a sole owner-employee to make greater tax-deferred contributions than would be permitted under the others.
Fortunately, a 401(k) look-alike plan allows executives to overcome this discrimination by permitting tax-deferred contributions to a nonqualified retirement plan.
Most Americans are now familiar with 401(k) plans epitomized by employee tax-deferred contributions (often with a company match).
Individuals who choose this option can supplement their individual accounts with additional tax-deferred contributions.
The statutory yearly limit on tax-deferred contributions to a 401(k) plan is $8,475--not much for a highly compensated executive.
Also keep in mind that, starting in 1997, both spouses can make tax-deferred contributions of up to $2,000 each to an IRA.