Put Your Deferred Compensation Strategy Into Place

As you’re nearing retirement, it’s important that you use all the resources at your disposal to get ready for your golden years. Deferred compensation may be a tool that you can use to help. Deferred compensation lets you direct part of your salary into a specific plan or account. Your employer then pays you that income at a future date, typically when you retire. In addition to helping you save for your golden years, a deferred compensation plan can be an ideal tax deferral strategy. Deferring pre-tax dollars lowers your taxable income. In many cases, you don’t pay taxes on those contributions until you retire. At that time, you’ll likely be in a lower tax bracket, meaning you owe fewer taxes on distributions from the plan.

There Are Two Types of Deferred Compensation Plans:

Qualified Deferred Compensation Plans
Qualified deferred compensation plans must operate under Employee Retirement Income Security Act (ERISA) rules, and thus all employees within the organization must be offered the opportunity to participate. Contributions are capped by law. Common QDC plans include 401(k) and 403(b) retirement plans.

Non-Qualified Deferred Compensation Plans
Sometimes known as “golden handcuffs,” NQDCs are offered mostly to executives and higher-level employees. NQDCs don’t have to abide by ERISA rules. This means the plan doesn’t have to be offered to all employees. Additionally, contributions aren’t capped. Participants can direct an unlimited amount of their salaries to the plan.

What to Consider When Making a Deferred Contribution

Before diving into your deferred contribution strategy, it’s a good idea to consider the following:

• Income: How much do you realistically need for your current living expenses?
• Tax impact: Analyze both the taxes you owe on income now, and what you might owe when you retire.
• Deferral time period: This is the length of time from now until distribution. If you’re farther away from retirement, smaller deferral amounts might make sense, as you’ll have more time to accumulate savings.

Deferred compensation plans are just one of many options to help you plan for your upcoming retirement. What works best for you will depend on your circumstances and goals. To talk through your retirement planning options, contact the office.

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^{The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.}