Create Electronically Signed Deferred Compensation Plan For Free

Put the plan in writing: Think of it as a contract with your employee. Be sure to include the deferred amount and when your business will pay it. Decide on the timing: You'll need to choose the events that trigger when your business will pay an employee's deferred income.

The Bottom Line. If you have a qualified plan and have passed the vesting period, your deferred compensation is yours, even if you quit with no notice on very bad terms. If you have a non-qualified plan, you may have to forfeit all of your deferred compensation by quitting depending on your plan's specific terms.

If people are not comfortable leaving deferred compensation in the hands of their employer, pre-retirement distributions allow them to protect their money by withdrawing it from the plan, paying tax on it, and investing it elsewhere.

You'll owe a 50 percent federal penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn ? You'll still have to withdraw the required amount and pay any income tax due.

Con: Fewer Investment Options The money in a deferred compensation plan is frequently placed directly into company stock. You might not have the choice of diversifying the investments. As the value of the company fluctuates, your built-up savings could go up and down too.

401(k): An Overview. Deferred compensation plans offer an additional choice for employees in retirement planning and are often used to supplement participation in a 401(k) plan. Deferred compensation is simply a plan in which an employee defers accepting part of their compensation until a specified future date.

2 The payment of the deferred compensation will be reported on Form W-2 even if you are no longer an employee at the time. You are also taxed on the earnings you get on your deferrals when they are paid to you. The rate of return is fixed by the terms of the plan.

If you're setting aside money for retirement but can only choose between a limited set of investments in your 401(k) and deferred comp plan, then you might be better off avoiding the deferred comp plan and putting money in a taxable brokerage account instead.