A salary deferral agreement (SDA) is a type of retirement plan that allows employees to defer a portion of their salary into a tax-advantaged account, such as a 401(k) or 403(b). These plans are often offered by employers as a way to incentivize employees to save for retirement.

The basic premise of a salary deferral agreement is simple: you agree to have a portion of your paycheck withheld and put into a retirement account rather than receiving it as taxable income. This can be a great option for those who want to save for retirement but don`t have the discipline to do so on their own.

When you sign up for an SDA, you`ll specify how much of your salary you want to defer and which retirement plan you want to use. Your employer will then deduct that amount from your paycheck before taxes are applied, which reduces your taxable income for the year. This means you`ll pay less in income taxes and have more money saved for retirement.

One of the biggest advantages of an SDA is the tax benefits. Since the money you defer is not subject to income taxes, it can grow tax-free until you withdraw it in retirement. Additionally, many employers offer matching contributions, meaning they`ll contribute a certain amount to your retirement account based on how much you defer.

It`s important to note that there are limits to how much you can defer each year. For 2021, the IRS allows employees to defer up to $19,500 in a 401(k) or 403(b) plan. If you`re age 50 or older, you can also make catch-up contributions of up to $6,500.

There are a few potential downsides to consider as well. For one, your deferrals are subject to vesting, which means you may not be able to keep all of the money your employer contributes if you leave your job before a certain period of time. Additionally, withdrawals from your retirement account are subject to income taxes and potentially early withdrawal penalties if you take them before age 59 1/2.

Overall, a salary deferral agreement can be a great way to save for retirement while minimizing your tax burden. If your employer offers an SDA, it`s worth considering as part of your overall retirement strategy.