A W-2 statement is confusing for even the most financially savvy individuals. During tax time, employees must pay attention to these financial statements even for those who are hiring tax preparers to handle their end-of-year finances. It is important to understand all components of a W-2 in order to ensure that the forms are correct.
Can You File Your Taxes Online Using Your Last Pay Stub from December?
Who Has a 414(h)?
Not everyone will see a 414(h) code on their W-2 forms. This code is specifically for government employees who are part of tax-deferred retirement plans. Employees of educational institutions might see 403(b), whereas employees of private institutions might find the more familiar 401(k).
What Do the Numbers Mean?
Box 14 of the W-2 statement likely has a dollar amount listed with the 414(h). This is the number of funds that were contributed to the retirement plan. The 414(h) funds are not taxable. This means that they are removed from the paycheck and placed in the special retirement savings account prior to taxes being assessed.
Why Might Someone Contribute to a 414(h)?
There are multiple reasons to take advantage of a tax-deferred savings account. The first, and likely most important, is that it allows one to save for a future date when he or she chooses to stop or is unable to continue employment. The sooner a person begins to contribute to a 414(h), the more money they will have upon retirement. Another reason to contribute to a 414(h) is to reduce taxable income. This saves on payroll taxes as well as year-end taxes at the federal level.
What is the Difference Between Tax-Free and Tax-Deferred?
A tax-deferred plan is one that is not taxed at the time the money is put into savings. However, when the money is removed, it will be considered taxable income. That means that anyone who uses their 414(h) will need to factor in the amount that is used for taxes along with their living expenses. Tax-free accounts are those that are never taxed. These are rare in the United States.
Will I Get Penalized for Withdrawing Money from a 414(h)?
When money is withdrawn from a 414(h) plan, it is considered taxable income. Those individuals who are considering an early withdrawal will face an additional penalty tax of 10 percent.