What is Deferred Compensation
Deferred compensation refers to an agreement between an employer and an employee to postpone receiving a portion of the employee's earned income until a later date. This means you agree to have some of your pay withheld and then receive it at a future point, usually upon retirement, termination, or another specified event.
Here are some key aspects of deferred compensation:
Benefits
* Tax advantages: In many cases, the deferred income is not taxed until it is paid out, potentially leading to significant tax savings.
* Retirement planning: It can be a valuable tool for saving for retirement and building a nest egg.
* Incentive for employees: Companies may offer it as an incentive to attract and retain key employees.
Types
* Qualified plans: These plans adhere to strict government regulations and offer tax benefits. Examples include 401(k)s and 403(b)s.
* Non-qualified plans: These plans offer more flexibility but don't come with the same tax advantages. Examples include stock options and bonus plans.
Considerations
* Accessibility: There may be restrictions on when you can access the deferred money, so it's important to understand the terms of the plan.
* Taxes: Even though you might get a tax break initially, remember you'll pay taxes on the income when you receive it later.
* Investment risks: Some plans invest the deferred money, which carries inherent risks.
Who should consider it
* Individuals aiming for long-term financial goals like retirement.
* Employees concerned with maximizing their retirement savings.
* High-income earners who can benefit from tax advantages.