An elective-deferral contribution is a form of savings that is directed into an employer-sponsored retirement plan. The money that is set aside through this process is taken out of an employees gross salary, hence lowering their taxable income, while the money they do receive is taxed after they withdraw it in retirement, which is in a lower tax bracket overall. This makes elective-deferral contributions a great way to save for retirement, as you will save more with this type of contribution.

The IRS limits the amount of money you can contribute to a qualified retirement plan. for 2021, individuals under the age of 50 can contribute up to $19,500 into a 401(k). For 2021, individuals 50 and above can make catch-up contributions of an additional $6,500 for a total of $26,000. In 2022, the contribution limit to a 401 (k) rises to $20,500 and in 2023, the contribution limit rises to $22,500. For individuals over the age of 50, they can also make "catch- up" contributions in certain cases. In addition, in some cases, if you are married and you are both eligible, you may both be able to make elective deferral contributions.

Since elective-deferral contributions are made pre-tax, they can lessen the amount of income tax that needs to be paid each year. They also may be eligible for a matching contribution from your employer, meaning that the more you put in, the more they will match up to a certain percentage.

Making elective-deferral contributions can also have other long-term benefits. Most importantly, it provides financial security in retirement, allowing you to have consistent income when you are no longer able to work. Additionally, it may also help you save on taxes in the long-run since the money that is vested and put into retirement savings accounts is taxed at a lower rate than regular income.

Ultimately, when deciding whether elective-deferral contributions are right for you, the key is to weigh the benefits and drawbacks. It’s important to consider whether you have the financial ability to set aside a portion of your salary for retirement, how much you can afford to save, how you plan to manage your retirement savings and whether a company match is available. By taking all of these factors into account, you can decide whether elective-deferral contributions are the right choice for you.