Tax Deferral Methods You Should Be Using

Tax Deferral Methods You Should Be Using



Tax Deferral Methods you​ Should Be Using
Tax Deferral
Tax deferral is​ the​ method whereby most Americans plan their savings and retirement funds .​
It is​ the​ ingenious method whereby IRAs (initial retirement accounts) are created .​
An incentive if​ you​ would for the​ employee to​ create retirement savings account by having his employer deduct pre-tax dollars and deposit them in​ an​ individual account for the​ future .​
One such tax deferred based plan is​ the​ 401(k) .​
It consists of​ three basic types; the​ simple,​ the​ safe harbor and the​ traditional 401(k) plans .​
Although the​ employer does not report these elective deferrals as​ current income,​ he does report them for wages which are subject to​ social security (FICA),​ Medicare and federal unemployment taxes (FUTA) on​ the​ participants Form W-2,​ Wage and Tax Statement .​
There are two benefits that the​ 401(k) plan possesses:
1) Employer contributions are deductible on​ the​ employers federal tax return as​ long as​ they conform to​ the​ limitations outlined in​ Publication 560.
2) Any elective deferrals and investment gains enjoy tax deferred status until these funds are distributed.
The traditional 401(k) plan allows all eligible employees to​ make pre-tax deferrals through payroll deductions .​
The employer has the​ option of​ making contributions on​ the​ behalf of​ all employees or​ making matched contributions based on​ the​ elective deferrals of​ employees or​ both .​
The contributions of​ the​ employer can be controlled by a​ vesting schedule which stipulates that after a​ certain period of​ time these contributions become nonforfeitable to​ the​ employee or​ become immediately vested .​
The contributions of​ the​ employer must meet certain non-discriminating criteria which prevents higher contribution to​ those making higher salaries.
The Safe Harbor 401(k) is​ the​ same as​ the​ traditional 401(k) but provides the​ stipulation that all employer contributed funds must be fully vested .​
Those employer contributed funds may match those deferred by employees through payroll deduction or​ may be made by the​ employer for all employees .​
This plan does not require the​ non-discrimination regulations that pertain to​ the​ traditional 401(k) plan .​
However,​ the​ company must provide an​ annual notice which details the​ employees rights and obligations under the​ Safe Harbor 401(k) plan.
The SIMPLE 401(k) plan was developed so small businesses could have a​ means to​ effectively provide a​ retirement plan when they had 100 or​ fewer employees .​
As with the​ safe harbor 401(k) the​ employer must make contributions that are fully vested .​
It is​ available to​ employees who have been compensated at​ least $5,​000 in​ wages the​ previous tax year .​
Employees enrolled in​ this investment plan may not be enrolled in​ any other retirement plan of​ the​ employer.
These are just a​ few of​ the​ available plans which use the​ principle of​ tax deferral .​
New for 2018 is​ the​ Roth deferral wherein the​ employee can allocate a​ portion of​ their tax deferred contribution to​ a​ Roth 401(k).




Related Articles:




Powered by Blogger.