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Section 401(k) Plans, Section 403(b) Plans and governmental Section 457(b) Plans generally permit employees to defer compensation on a pre-tax basis.
What Is a Tax-Deferred Savings Plan? A tax-deferred savings plan is an investment account that allows a taxpayer to postpone paying income taxes on the money invested until it is withdrawn, generally after retirement. The best-known such plans are individual retirement accounts (IRAs) and 401(k) plans.
Deferred compensation plans are optional programs that allow employees (individuals who are officers or employees of a state agency) to defer income until retirement. A deferred compensation plan is offered in addition to a retirement, pension or benefit system established by law.
Deferred compensation plans allow employees to withhold a certain amount of their salaries or wages for a specific purpose. Deferred compensation plans can be qualified or non-qualified. Qualified plans fall under the Employee Retirement Income Security Act and include 401(k)s and 403(b)s.
An executive deferred compensation plan allows employers to defer a part of their executives' income so that they will pay taxes on it later when they start withdrawing from it.
Deferred compensation is an addition to an employee's regular compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out. There are many forms of deferred compensation, including retirement plans, pension plans, and stock-option plans.
When you participate in a deferred compensation plan, you can defer part of your salary and income taxes until sometime in the future. Although it sounds simple, assumptions and potential risks must be addressed before opting in.