What is an Elective Deferral Contribution?

by Investing School on December 17, 2012

An Elective Deferral Contribution is a contribution arrangement where the employer places funds into a retirement plan set up for an employee. What is different about this plan is that the employee can opt to have some of their salary placed into the account instead of taking it as normal compensation. Taxes are deferred upon the contribution until the funds are withdrawn during retirement.

Also known as salary deferral these contributions are made in addition to normal employer contributions to a standard retirement plan. The wages are withheld and then moved directly into the retirement account. If the employee’s wages are commission-based a portion of those wages can also be diverted as an elective-deferral contribution.

Not all countries allow an Elective-Deferral contribution plan. Those that do allow them place caps upon the amount that an employee can divert annually. Factors that determine the total may include marital status and total earnings.

For those who make this sort of arrangement there are two key advantages. The first is an increase in retirement savings. The more funds placed into IRAs the better their standard of living when the time comes. The second is a decrease in the amount of taxes paid upon income. Not only do such contributions help lower the tax burden immediately, but also by placing the individuals in a lower tax bracket, when they do pay taxes later, they pay them at the rate of a retiree. Such savings are considerable.

If such an arrangement is available to you it is best to consult with a qualified retirement planner to make the best use of your contributions.

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