Do you know the difference in types of retirement plan contributions?
Your employer-sponsored retirement plan may allow you to choose the types of
contributions you make to the plan from your wages.
Here’s a brief description of the different types of contributions your may be able to make:
• Pre-tax elective deferrals – You don’t include these amounts in your
gross income in the year that you make the contributions. For example, if
you direct your employer to contribute $2,000 from your $30,000 salary in
2016, you only include $28,000 in your gross income. You will have to
include these contributions, plus any earnings, in your income when you
withdraw them from the plan.
• Designated Roth contributions – These are elective deferrals that are
included in your gross income in the year you make the contributions, but
not when you withdraw them from the plan. Also, if you meet certain
conditions, you don’t have to include any earnings on these contributions
in your income when you withdraw them from the plan.
• After-tax employee contributions – These amounts are also included in
your gross income in the year you make the contributions. Although you
don’t have to include these contributions in income when you withdraw
them from the plan, you do have to include any earnings. Unlike elective
deferrals, there is no annual dollar limit on the amount of these
contributions you can make, but if you are a highly compensated
employee, your after-tax employee contributions may be limited by what
other employees contribute.
• Catch-up contributions – These are additional elective deferrals you
may be able to contribute to the plan if you are age 50 or older by the end
of the calendar year. You can make these contributions as pre-tax elective
deferrals or designated Roth contributions or any combination of the two.
2016 elective deferral limits:
• $18,000 to 401(k) (other than a SIMPLE 401(k)), 403(b) and 457(b) plans
(plus $6,000 catch-up contributions)
• $12,500 to SIMPLE plans (plus $3,000 catch-up contributions)
• Take advantage of your employer-sponsored retirement plan to save for
your future. Ask your employer or check your plan documents to find out
what types of contributions you can make to your plan.
The following links from the IRS are also helpful:
Tax Information for Retirement Plans