Deferred Compensation

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:


* 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.


* 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.


* 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.

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