Deferred Compensation

What is deferred compensation?

Deferred compensation is a strategy by which an employee sets to the side income for pay sometime in the not too distant future.
You ought to likewise note that assuming your company declares financial insolvency, any funds in a non-qualified deferred compensation plan are not protected from creditors.

More profound definition

A deferred compensation plan permits employees to place income into a retirement account where it sits untaxed until they pull out the funds. After withdrawal, the funds become subject to taxes, albeit this is typically substantially less assuming that payment is deferred until retirement.

Deferred compensation model

Instances of deferred compensation incorporate retirement, pension, deferred savings and investment opportunity plans offered by employers. By and large, you pay no taxes on the deferred income until you receive it as payment.
Deferred compensation plans come in two types — qualified and non-qualified. Qualified retirement plans, for example, 401(k), 403(b) and 457 plans, are offered to all employees and are taxed when the contribution is made to the account.
Likewise called 409(a) plans, non-qualified deferred compensation plans are offered to executives and key employees. There are no restrictions on contributions, and these plans permits the company to defer payment of a smart pay while giving the beneficiary a method for saving something else for retirement that a qualified plan.
Likewise focused on key executives, one more type of deferred compensation plan is the supplemental executive retirement plan. A SERP mirrors defined-benefit plans in that they guarantee a set amount at join that you receive at retirement.
A portion of the more normal approaches to working out the amount of a SERP incorporate a flat dollar amount for an endless supply of years, a percentage of your salary times the number of years at retirement or a percentage of salary to a certain number of year.
The plan might in fact be structured for funding by a cash value life insurance policy to pay out to your beneficiaries in case you kick the bucket rashly.

Highlights

• The allure of deferred compensation is dependent on the employee's personal tax situation.
• Deferred compensation plans are an incentive that employers use to hold onto key employees.
• The fundamental risk of deferred compensation is on the off chance that the company fails you might lose everything put away in the plan.
• Deferred compensation can be structured as either qualified or non-qualified.
• These plans are best appropriate for high earners.