Written by Salary.com Staff
September 20, 2023
Have you ever wanted to save money for the future without immediately paying taxes on it? That is exactly what deferred compensation plans allow you to do. Contributing to one now allows your money to grow before you must pay taxes during retirement.
This article covers everything you need to know about deferred compensation plans.
Deferred compensation plans refer to employees and employers agreeing to defer part of their pay until retirement. Here are two types of deferred compensation plans:
Qualified Plans
Like 401(k)s, qualified plans let you contribute pre-tax checks. The funds in the account can grow tax-deferred until you withdraw them in retirement. Employers often match the contributions to these plans, providing a straightforward way to boost your retirement savings.
Non-Qualified Plans
Non-qualified plans are more flexible but do not offer the same tax benefits. Contributions are post-tax, but funds grow tax deferred. When you finally take out the money, you must pay regular income taxes on it. If you have maxed out your qualified plan contributions, these plans are a good option.
No matter the type, deferred compensation plans eventually provide numerous benefits for your financial well-being, which include:
With a deferred compensation plan, time is on your side. Start contributing as early as possible to enjoy the rewards of long-term, tax-advantaged growth and a comfortable retirement.
A deferred compensation plan is the best option for you if you want to save more for retirement in a tax-advantaged way. These plans allow you to set aside income you can use later in life.
Contributions to deferred compensation plans are tax-deferred, meaning you do not pay income taxes on the money until you withdraw it. Plus, it allows your money to grow tax-free for years.
The longer you keep money in the plan, the more it can grow through compound interest. When you withdraw cash, your regular income tax rate applies. In the end, a financial advisor can help determine which option matches your needs and financial goals.
Here are some key benefits of contributing to a deferred compensation plan:
If tax-advantaged retirement savings and flexibility sound appealing, a deferred compensation plan is an excellent choice for your financial future.
Setting up a deferred compensation plan is a smart way to save for your future. These plans will help you save more effectively for retirement or other financial goals. By deferring income, you delay paying taxes until the plan pays out.
Deferred compensation also gives your savings more time to grow on a tax-deferred basis. Most deferred compensation plans also offer the option to receive payouts over time in retirement. It helps you manage the tax burden in those years with lower income.
Overall, deferred compensation plans provide an uncomplicated way to boost your savings and take advantage of tax incentives designed to support long-term financial security. Why wait? Take that first step today. Your future self will thank you.
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