Cash or Deferred Arrangement (CODA)

Cash or Deferred Arrangement (CODA)

A Cash or Deferred Arrangement (CODA), most widely recognized under the term 401(k), is a type of retirement plan offered by employers to their employees. It permits employees to elect to get cash payment as part of their taxable income or defer receipt of the money, contributing it into a tax-deferred savings account.

Under this scheme, the main benefits for employees are the tax deferral on the contributions and the possibility for employers to match contributions, thereby increasing the retirement savings significantly.

Examples of CODA

1. Employee Contributions:

   • An employee chooses to defer $5,000 of their salary into a 401(k) plan. The contributed amount is not included in their gross income for the year, deferring tax liability until the funds are withdrawn in retirement.

2. Employer Match:

   • An employer agrees to match 50% of employee contributions up to 6% of their salary. If an employee earning $50,000 contributes 6% ($3,000), the employer will add an additional $1,500 to the employee’s 401(k) account.

3. Tax-Deferred Growth:

   • Contributions and earnings (interest, dividends, and capital gains) grow tax-deferred until they are withdrawn at retirement, potentially reducing the overall tax burden during the individual’s working years.

Frequently Asked Questions (FAQs)

1. What are the contribution limits for a 401(k) plan?

   • As of 2023, the contribution limit for employees under age 50 is $22,500, and for those aged 50 and above, an additional catch-up contribution of $7,500 is allowed, totaling $30,000 per year.

2. Can I contribute to both a traditional 401(k) and a Roth 401(k)?

   • Yes, individuals can contribute to both types within the annual IRS contribution limits. The combined contributions cannot exceed the annual limit.

3. When can I withdraw funds without penalties?

   • Generally, you can start taking penalty-free withdrawals from a 401(k) after reaching age 59½. Early withdrawals may incur a 10% penalty and income taxes unless an exception (such as hardship or disability) applies.

4. What happens to my 401(k) if I change jobs?

   • You can roll over your 401(k) balance to a new employer’s plan, an IRA, or leave it in the current plan if the balance meets the plan’s minimum requirements.

5. Are employers required to match employee contributions?

   • No, employer matching contributions are not mandatory. Each employer determines their match policy.

Related Terms

• 401(k): A specific type of CODA that allows for employee contributions and potential employer matching to a retirement savings account.
• Roth 401(k): A variation where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.
• IRA (Individual Retirement Account): A retirement savings account with tax advantages, which can be a traditional IRA or a Roth IRA depending on the tax treatment of contributions and withdrawals.

References

• Investopedia: 401(k) Plan
• IRS: Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits

Suggested Books

1. The 401(k) Millionaire: How I Started with Nothing and Made $12 Million Investing in 401(k)s and IRAs by William K. Cross
2. *Save Smart, Earn More: Financial Literacy *for Millennials *by Karen Stefanini
3. A Good Financial Advisor Will Tell You… by Robert Fragasso

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