Tax advantages. One of the primary benefits of deferred compensation plans is the potential for tax savings. By deferring income, employees can reduce their taxable income in the current year, potentially lowering their tax bracket. This deferred income is then taxed at a later date, often when the individual is in a lower tax bracket, such as during retirement.
Retirement savings boost. Deferred compensation plans can serve as an additional retirement savings vehicle. Unlike traditional retirement accounts, there are typically no contribution limits, allowing high earners to save more for retirement. This can be particularly beneficial for those who have already maxed out contributions to other retirement accounts like 401(k)s or IRAs.
Financial flexibility. These plans offer flexibility in financial planning, allowing employees to tailor their income stream to meet future needs. Participants can often choose when and how they receive their deferred compensation, providing a customizable approach to managing future cash flow. This flexibility can be beneficial when planning large expenses or managing income during retirement.
Employer incentives: Employers often use deferred compensation plans as a tool to attract and retain top talent. By offering these plans, companies can provide a competitive edge in their benefits package, which can be appealing to employees looking for long-term financial security. This can lead to increased employee loyalty and reduced turnover.