What Is Deferred Compensation?

Deferred compensation is a type of compensation that is paid to an employee at a later date than when the work is performed. This can be done in a number of ways, such as through a salary deferral plan, a bonus deferral plan, or a stock option plan.

There are a number of reasons why an employee might choose to defer their compensation. One reason is to save for retirement. By deferring their compensation, the employee can take advantage of compound interest and grow their savings over time. Another reason to defer compensation is to reduce taxes. By deferring their compensation, the employee can delay paying taxes on the income until a later date, when they may be in a lower tax bracket.

Deferred compensation can be a valuable tool for employees who want to save for retirement or reduce their taxes. However, it is important to understand the terms of the plan before agreeing to defer compensation. There may be restrictions on when the employee can access the deferred compensation, and there may be penalties for early withdrawal.

Here are some of the key things to consider when evaluating a deferred compensation plan:

* The type of plan: There are a number of different types of deferred compensation plans, each with its own set of rules and regulations. It is important to understand the different types of plans before choosing one.
* The terms of the plan: The terms of the plan will specify how much compensation can be deferred, when the deferred compensation can be accessed, and what happens if the employee leaves the company before the deferred compensation is vested. It is important to read the terms of the plan carefully before agreeing to participate.
* The tax implications: The tax implications of deferred compensation can be complex. It is important to consult with a tax advisor to understand how deferred compensation will affect your taxes.

Deferred compensation can be a valuable tool for employees who want to save for retirement or reduce their taxes. However, it is important to understand the terms of the plan before agreeing to participate.