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With a traditional 401(k) contribution provision, your eligible employees have the option to defer a portion of their pay into the Plan as a tax-deferred contribution. Traditional 401(k) contributions are not included in the employee’s taxable income in the year contributed, but are instead considered taxable in the year they are withdrawn from the account. Investment earnings on these voluntary contributions can also grow tax-deferred, and will also be included in taxable income in the year withdrawn from the account. In addition to allowing employees to bolster their retirement savings, this option helps employees have some control over their annual tax liability, since employees who expect to be in a lower tax bracket in retirement than they are now can benefit by reducing their current taxable income.
401(k) elective deferrals are subject to an annual limit per individual. For the 2022 plan year, the limit is $20,500. An individual over the age of 50 may also contribute an additional $6,500 in catch-up contributions, for a total voluntary employee contribution of $27,000.