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.
* Tax-deferred contributions
(federal and state income tax, where applicable),
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.
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
. About 25 percent of British workers have chosen the personal retirement option over state or employer pensions.
The statutory yearly limit on tax-deferred contributions
to a 401(k) plan is $8,475--not much for a highly compensated executive.
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.