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...
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