Deferred compensation is a strategy where a portion of one’s earnings is set aside for payment at a later date than when it was initially earned.
Employers commonly use this practice for two main reasons. Firstly, it provides tax benefits on the earned income. Secondly, it acts as a tool for incentivizing and retaining valuable employees. Although opting for deferred compensation is voluntary, many employees opt for it to manage their tax obligations effectively.
FAQ
Unlike regular compensation, which is typically received as salary or wages for work performed in the current period, deferred compensation allows employees to defer a portion of their income to a future date, providing potential tax advantages and retirement savings opportunities.
Participating in a deferred compensation plan can offer several benefits, such as tax deferral on contributions and potential investment growth, employer matching contributions (if applicable), and the ability to supplement retirement income.
While deferred compensation plans can offer valuable benefits, they also come with risks. These may include investment risk if the plan involves market-based investments, forfeiture of contributions if certain conditions are not met, and potential changes in tax laws that could affect the tax treatment of deferred income.
Eligibility criteria for deferred compensation plans vary depending on the specific plan and employer policies. In many cases, full-time employees are eligible to participate, although certain plans may have additional requirements or restrictions.
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