A reduction in wages is a contribution to an old-age savings plan that generally represents a percentage of a worker`s earnings. For some plans, contributions to the reduction of wages (also known as deferred contributions) can also take the form of a certain amount in dollars, which contributes to an employer-sponsored old age savings plan, for example. B 401 (k), 403 (b) or IRA SIMPLE. Salary reduction contributions paid with an after-tax dollar must be reported as income on a worker`s tax return. When a plan authorizes after-tax contributions, such compensation is not excluded from income. An employee cannot therefore deduct them from the tax return during the tax year of the contribution. As a general rule, salary reduction contributions are generally a percentage of the employee`s salary or salary. Some plans allow the employee to contribute a certain amount in dollars for each salary period throughout the year. The IRS also proposes a contributory wage reduction plan called SARSEP or the simplified employee retirement plan for salary reduction. These plans are proposed by small businesses, which typically employ fewer than 25 people, allowing employees to pay pre-tax contributions to their individual pension accounts (IRAs) by reducing their wages. Employees cannot contribute more than 25% of their income per year or $19,500 in 2020 and 2021. Salary reduction contributions allow employees to set up automatic and recurring deductions on their paychecks, which are paid into an employer-sponsored pension account.
Wage reduction contributions are traditionally pre-tax, i.e. contributions reduce the taxable income of individuals during the contribution year. In some cases, contributions can be made with after-tax dollars, such as a Roth 401 (k) that does not provide a tax deduction in advance, but withdrawals or distributions are tax-exempt in retirement. The Internal Revenue Service (IRS) sets the annual limit on the amount of money that can be put into a retirement plan. The annual limit of 401 (k), 403 (b) and Roth 401 (k) – for 2020 and 2021 – is $19,500 per year. For those aged 50 and over, a catch-up contribution of $6,500 can be added for 2020 and 2021. However, the maximum amount an employee can contribute to the single IRA is $13,500 for 2020 and 2021. As a general rule, the saver or employee defers the payment of taxes on their contributions until they accept distributions or payments in retirement. As a result, the resources saved are growing fiscally.