Definition
A Cash Or Deferred Arrangement (CODA) is a provision in a qualified retirement plan, such as a 401(k) plan, which gives employees the option to receive cash currently (as salary) or defer a portion of their salary into a retirement account. The deferred amount is typically exempt from federal income taxes until it is withdrawn, usually at retirement. This deferral can lead to significant tax benefits and can aid in long-term retirement savings.
Examples
- 401(k) Plans: One of the most common types of CODAs, where employees can choose to defer a portion of their salary into the plan. Employers may also provide matching contributions.
- 403(b) Plans: Similar to 401(k) plans but for employees of certain public schools, tax-exempt organizations, and ministers.
- SIMPLE IRA Plans: Simplified Employee Pension plans that offer income deferral and are easier to administer for small businesses.
Frequently Asked Questions
What is the main benefit of a CODA?
The primary benefit of a CODA is the tax advantage. Employees can defer income tax on their earnings until they withdraw funds, typically upon retirement, potentially lowering their current tax liability and allowing their investments to grow tax-deferred.
Are there any limits on contributions to a CODA?
Yes, the IRS sets annual limits on the amount of income that can be deferred into a CODA. For instance, in 2023, the contribution limit for 401(k) accounts is $22,500, with an additional catch-up contribution limit of $7,500 for employees aged 50 and above.
How does employer matching work in a CODA?
Employer matching in a CODA means that the employer contributes a certain amount to the employee’s retirement plan based on the employee’s own contributions, adding an extra incentive for employees to participate in the plan.
Can contributions to a CODA be withdrawn at any time?
Withdrawals from a CODA typically come with restrictions. Withdrawals before the age of 59½ may incur a 10% early withdrawal penalty and ordinary income tax on the withdrawn amount, though there are some exceptions.
What happens to my CODA if I leave my job?
If you leave your job, you have several options for your CODA funds: you can leave the funds in the current plan, roll over the funds into a new employer’s plan if allowed, roll over to an IRA, or cash out (though the latter option has tax consequences and potential penalties).
Related Terms
- 401(k) Plan: A retirement savings plan sponsored by an employer allowing employees to save and invest a portion of their paycheck before taxes are taken out.
- 403(b) Plan: Retirement plan for certain employees of public schools and tax-exempt organizations.
- SIMPLE IRA: Savings Incentive Match Plan for Employees Individual Retirement Account, a retirement plan that organizations with 100 or fewer employees can offer.
- ROTH 401(k): A retirement savings plan that allows post-tax contributions, meaning withdrawals are tax-free if certain conditions are met.
- Defined Benefit Plan: A retirement plan where employee benefits are computed using a formula that considers factors such as salary history and duration of employment.
Online Resources
Suggested Books for Further Studies
- Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches by Allen, Melone, Rosenbloom, and Steverson.
- The 401(k) Owner’s Manual: Preparing participants for retirement by Stephen J. Butler.
- IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out by Twila Slesnick and John C. Suttle.
- The Simple Path to Wealth: Your road map to financial independence and a rich, free life by JL Collins.
- How to Make Your Money Last: The Indispensable Retirement Guide by Jane Bryant Quinn.
Fundamentals of Cash Or Deferred Arrangements: Taxation Basics Quiz
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