If you’re thinking about your financial future (and we suspect you are, if you’re reading this blog), you’ve probably got some questions about retirement and the types of contributions you’re required to make. If you’re part of an employer sponsored retirement plan, there are choices you can make regarding your wage contributions. These can be divided into four different types.
First, there are pre-tax elective deferrals. These amounts are not included in your gross income for the year of the contribution. If you’ve asked your employer to take $2,000 from your $30,000 salary, you only include $28,000 in income. You’re required to include these contributions, any earnings, and income when they’re withdrawn from your retirement plan.
Next, there are Designated Roth contributions, which are elective deferrals. They’re included in your gross income the year that they’re made, but not when you withdraw them from your retirement plan. Assuming you meet a certain set of conditions, you are not required to include any earning on these contributions in your income when withdrawing them.
You’ve also got the after-tax employee contribution. Here, you include these amounts in your gross income in the year they’re made. You are not required to include these in your income when you withdraw them from your retirement plan, but you do have to include earnings. There is no annual dollar limit on the amount you can contribute annually, but if you are a high earner, your after tax employee contributions might be limited based on what other employees can contribute.
Finally, there are catch-up contributions. In this case, there are elective deferrals that you may be able to contribute to the plan, assuming you are at least 50 years old by the end of the calendar year. You’re able to make these contributions as pre-tax elective deferrals or as Designated Roth contributions.
For more information regarding types of contributions and the specific details of each (including limits), visit the IRS website. It’s surprisingly easy to use, informative, and useful. Learn about your options now, even if retirement (or even saving for it) is still a few years away.
* Read more from Young Wealth
The Young Wealth Team