# Elective-Deferral Contribution: What It Is, How It Works, Limits

![401(k) Contribution Limits and Account Balances](https://www.investopedia.com/thmb/Qt0DbrNhpjWUXbYiahvroD-vVSg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/401k-contribution-account-balances-56a090ef5f9b58eba4b19e99.jpg)

*It turns out that the 401(k) contributions have hit an all time high, most investors continued to stick to their plan during the Great Recession, and account balances for 401(k) plans are up significantly over the past few years.*

## What Is an Elective-Deferral Contribution?

An elective-deferral contribution is made directly from an employee's salary to their employer-sponsored retirement plan, such as a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp). With a 401(k) deferral, the employee must authorize the transaction before the contribution can be deducted.

Elective deferrals can be made on a [pre-tax](https://www.investopedia.com/terms/p/pretaxcontribution.asp) basis. The [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) establishes limits on how much an employee can contribute to a [qualified retirement plan](https://www.investopedia.com/terms/q/qrp.asp). 

An elective-deferral contribution is also known as a salary-deferral contribution or salary-reduction contribution.

### Key Takeaways

*   An elective-deferral contribution is a portion of an employee's salary that's withheld and transferred into a retirement plan, such as a 401(k) or 403(b).
*   Elective deferrals can be made on a pre-tax or after-tax basis if an employer allows it.
*   The IRS limits how much you can contribute to a qualified retirement plan.
*   Individuals under the age of 50 can contribute up to $23,000 in 2024 ($22,500 in 2023).
*   People age 50 and above can make catch-up contributions of an additional $7,500 in 2024 and 2023 for a total of $30,500 and $30,000, respectively.

## How Elective-Deferral Contributions Work

Elective-deferral contributions to traditional 401(k) plans are made on a pre-tax or [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) basis, effectively reducing an employee's [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp). Suppose an individual who earns $40,000 a year decides to make a 401(k) deferral of $100 per month. These deferrals total $1,200 per year. As a result, the employee's pay is taxed at $38,800 that year instead of $40,000. 

Since there's a tax break up front, any distributions are taxed at the [income tax rate](https://www.investopedia.com/terms/t/taxbracket.asp) for the retiree at the time of [withdrawal](https://www.investopedia.com/terms/w/withdrawal.asp). Several restrictions apply as to when and under what circumstances an employee can make withdrawals from an employer-sponsored retirement plan. For example, an additional 10% penalty tax may apply if an individual makes a withdrawal before age 59½—unless the employee meets the conditions for a [hardship withdrawa](https://www.investopedia.com/terms/h/hardship_withdrawal.asp)l. State and local taxes may also be assessed for early withdrawals.

Some employers allow workers to contribute toward [Roth 401(k)](https://www.investopedia.com/terms/r/roth401k.asp) plans. Contributions made to these plans are made on an [after-tax](https://www.investopedia.com/terms/a/aftertaxcontribution.asp) basis. This means that the funds are taxed before they are deposited into the [retirement plan](https://www.investopedia.com/retirement-planning-4689695).

> **Fast Fact**
>
> Since there's no pre-tax benefit with Roth 401(k)s, employees can withdraw contributions (not earnings) tax-free as long as they're over the age of 59½.

## Elective-Deferral Contribution Limits

The IRS has limits on how much money can be contributed to an employee's qualified retirement plan.

### Employee Contribution Limit

Individuals under the age of 50 can contribute up to $23,000 in 2024 ($22,500 in 2023) into a 401(k). Those age 50 or older can make [catch-up contributions](https://www.investopedia.com/terms/c/catchupcontribution.asp) of an additional $7,500 for 2023 and 2024 for a total of $30,500 for 2024 and $30,000 for 2023. These rules apply to Roth 401(k)s, as well.

IRS rules also apply if you have multiple 401(k) accounts. This means if a person under 50 invests in a traditional plan and a Roth plan, they can make 401(k) deferrals of up to $23,000 for 2024 and $22,500 in 2023.

### Employee and Employer Total Contribution Limit

The rules stated earlier apply only to elective-deferral contributions. They do not apply to the [matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp) from an employer, [nonelective employee contributions](https://www.investopedia.com/terms/n/non-electivecontribution.asp), or any allocations of forfeitures. The IRS limits the total amount that can be contributed to an employee's retirement plan from all sources, including the employer's matching and the employee's contributions.

The total contributions to an employee's retirement plan from both the employee and employer cannot exceed the lesser of:

*   100% of the participant's compensation  
    
*   $69,000 or $76,500, including [catch-up contributions](https://www.investopedia.com/401k-catch-up-contributions-5499024) for those age 50 or older in 2024
*   $66,000 or $73,500, including catch-up contributions for those age 50 or older in 2023

## What Is the IRS Limit for 401(k) Elective Deferrals?

An elective deferral is the amount that an employee chooses to deduct from their paycheck and deposit into an employer-sponsored retirement plan like a 401(k). The limit set by the IRS is $23,000 in 2024 and $22,500 in 2023. Individuals who are 50 or older can contribute an additional $7,500 each year for a total of $30,500 in 2024 and $30,000 in 2023.

Employers may also match a portion of the employee's contribution. This combined total cannot exceed the lesser of 100% of the employee's salary or $69,000 in 2024 ($76,500 with the catch-up contribution) and $66,000 in 2023 ($73,500 with the catch-up contribution).

## Are Elective Deferrals Tax-Deductible?

You cannot take a tax deduction for contributions to your 401(k) or employer-sponsored retirement plan on your annual tax return. But [your annual contribution](https://www.investopedia.com/ask/answers/03/072903.asp) can reduce your tax bill. Because you use pre-tax dollars for your contributions, it lowers your taxable income. This, in turn, lowers your overall tax bill.

## Are 401(k) Plans Insured by the FDIC?

Most of the money in a 401(k) is not insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). Your plan may be eligible for FDIC insurance if it meets certain criteria. For instance, FDIC insurance applies to certain accounts that allow participants to "direct how the money is invested."

## The Bottom Line

Saving for retirement is an important part of anyone's financial plan. If you can, make sure you take advantage of an employer-sponsored plan, such as a 401(k). These plans allow you to contribute pre-tax dollars, which also lowers your annual taxable income. This means you may even be able to lower your tax liability. If your employer provides a match, it sweetens the pot even more because it means free money in your account. Keep in mind that there are limits to how much you can contribute. If you go over these limits, you will have to correct them—and you may face penalties.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[401(k) Plan Fix-It Guide - 401(k) Plan - Overview](https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-401k-plan-overview)."
>     
> 2.  Internal Revenue Service. "[How Much Salary Can You Defer if You’re Eligible for More Than One Retirement Plan?](https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-one-retirement-plan)"
>     
> 3.  Internal Revenue Service. "[401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000)."
>     
> 4.  Internal Revenue Service. "[401(k) Plan Overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview)."
>     
> 5.  Internal Revenue Service. "[401(k) Resource Guide - Plan Participants - General Distribution Rules](https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules)."
>     
> 6.  Internal Revenue Service. "[Retirement Plans FAQs on Designated Roth Accounts](https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts)."
>     
> 7.  Internal Revenue Service. "[Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits)."
>     
> 8.  Internal Revenue Service. "[Operating a 401(k) Plan](https://www.irs.gov/retirement-plans/operating-a-401k-plan)."
>     
> 9.  Internal Revenue Service. "[2024 Limitations Adjusted as Provided in Section 415(d), etc](https://www.irs.gov/pub/irs-drop/n-23-75.pdf)." Pages 1-2.
>     
> 10.  Federal Deposit Insurance Corporation. "[Your Insured Deposits](https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf)." Page 6.