The term ‘Deferred compensation’ may have a different interpretation to many people, but it refers to delayed payment of a portion of someone’s income. Other times it is referred to as non-qualified deferred compensation plans (NQDCs), deferred comp, or golden handcuffs.
It comes in the form of a written agreement between two parties (employer and employee) and explains the voluntary acknowledgment on the part of the employee
Deferred Compensation is somewhat a saving plan. Its components include payouts such as retirement plans, wages, pensions, bonuses, and employee stock options (ESO). Sadly, not many people know about it even though it could be one of the best areas where anyone can save on their yearly tax liability. This is very helpful considering that many people are paying hundreds of thousands in form taxes.
Is it worth participating in a deferred compensation plan?
The decision of whether or not to participate in deferred compensation is so personal. In any case, everyone is looking for the slightest opportunity to maximize their savings. Nonetheless, it is worth mentioning that the deferred compensation plan is more suitable for those maximizing on their 401(k) contributions. These are sponsored by the employer, but they reduce an employee’s income because they must contribute equally to what the employer is making.
However, before deciding to be a participant in the deferred compensation plan, it is important to find out: –
- The period you plan to be with that employer. Leaving a few years to your retirement will not only be a risk for you, but it will threaten your employer’s financial position.
- How much does your employer owe you in terms of wealth? Many people are ignorant about what other financial benefits their employer owes them apart from the usual salaries. You will be surprised that you are entitled to benefits such as stock purchase plans.
- Present and future tax bracket. Will deferred compensation plan have any impact on your tax bracket now or in the future and during retirement?
- How strong is your employer financially? Your deferred compensation would become an unsecured debt owed by the company if it became bankrupt. This would translate to a total loss of your money.