Salary reduction plan

A salary reduction plan is a type of employer-sponsored retirement savings plan. Typical examples are traditional 401(k)s, 403(b)s, 457s, and SIMPLE IRAs.

A salary reduction plan allows you, as an employee, to contribute some of your current income to a retirement account in your name and to accumulate tax-deferred earnings on those contributions. In most plans, you contribute pretax income, which reduces your current income tax, and you pay tax at withdrawal at your regular rate.

Your employer may match some of or all your contribution according to a formula that applies on an equal basis to all participating employees. All salary reduction plans have an annual contribution cap that's set by Congress and allow annual catch-up contributions for participants 50 and older.

With Roth 401(k) and similar plans, you contribute after-tax income but qualify for tax-free withdrawals if you are older than 59 1/2 and your account has been open at least five years.