Has your employer or HR department offered you a deferred compensation plan? That probably means you’ve been promoted enough to land the big bucks. In that case, this opportunity should be considered an honor and a privilege. But before you sign on, you should know more about what you’re getting yourself into. Take a look at these considerations from your trusted financial advisors at Maggi Tax to decide if a deferred compensation plan is really the smart choice for you:
What Is a Deferred Compensation Plan?
A deferred compensation plan is a savings strategy that defers a portion of your earned income to be set aside for a later date. If you’re already familiar with 401(k)s, you may feel that the concept is rather the same. However, deferred compensation plans are crafted in a way that is of greater benefit to high-income earners. Even then, there are some possible drawbacks that need to be considered as these plans aren’t for everyone.
1.) Deferred Compensations Are Technically Not Yours to Control
One of the main differences between a deferred compensation plan and other common retirement savings accounts is the amount of control you have over your savings. While there are penalties in place, traditional retirement savings accounts like 401(k)s and Roth IRAs can be withdrawn and used at any given point. Deferred compensation plans, however, can not be retrieved or reallocated as the funds technically belong to your employer and are distributed at their will or under written circumstances.
2.) You Are Obligated to Stay With the Same Employer
If you ever plan on switching careers or looking for another place of employment, a deferred compensation plan may not be for you as your funding with your current employer will end and you will receive your compensation sooner than you want it. Continuing to be employed with a separate employer while receiving your deferred compensation will be subject to taxes just like the rest of your earned income.
3.) You Have to Leave or Retire to Start Receiving Compensation
Even if you plan to stay with the same employer until retirement, you will not receive your deferred compensation until you retire. In this economy, it’s not uncommon for employees to continue working through retirement. This plan makes it impossible for such hardworking individuals to receive what they have been contributing.
4.) Planning Ahead Becomes More Difficult With Deferred Compensation Plans
Traditional retirement savings accounts have the flexibility to adjust your contributions as needed in response to the changing economy. Deferred compensation plans are more difficult to adjust, requiring you to know what tax rates will be like in the far future which is practically impossible to do.
5.) This Plan Calls For a Higher Risk Tolerance
Deferred compensation plans are usually reserved for high earners because they require a higher risk tolerance than other savings methods. With too much at stake and with incredible uncertainty, you will need to be confident in your ability to take a loss at any given point. Even if you earn a high amount, you might want to go with a safer option like a 401(k) or Roth IRA to ensure your contributions don’t go to waste.
So Is a Deferred Compensation Plan Smart Or Not?
The only way we can safely suggest a deferred compensation plan is if you are already maxing out your contributions to all other retirement savings accounts including a Roth IRA, 401(k), and health savings account (HSA) with additional income to spare. These stipulations may only pertain to a select few, and even then, there are most likely better things you could be doing with any cash that you have lying around.
Find the Best Retirement Planning Strategy For You at Maggi Tax!
Call your trusted financial advisors at (727) 799-1701 for investment planning services near you. The Maggi Tax team is committed to helping you find the best ways to maximize your earnings for a better retirement. Start off on the right foot by visiting us for a consultation!
Scheduling