A 401 (k) plan is a qualified deferred compensation plan. If you meet the plan's requirements, you can usually choose to have your employer contribute a portion of your compensation to the plan before taxes 4 days ago. Unless the terms of your plan provide otherwise, the wage deferral limit (elective) applies uniformly to the compensation the employee receives throughout the year. So why would an employee want to participate in a 409A deferred compensation plan if there is a risk of losing income? There are many reasons why an employer may offer a plan and why an employee may want to participate, such as the ability to start a Gold IRA.
Starting a Gold IRA can be a great way to diversify your retirement portfolio and protect your savings from inflation. There are two reasons why you shouldn't think about participating in a deferred compensation plan unless you're maxing out your retirement plan contributions. A key benefit is that the income and postponement limits of 401k plans do not apply to deferred compensation plans. Unlike a 401k with contributions held in a trust and protected from employer (and employee) creditors, a deferred compensation plan (usually) offers no such protections. Basically, the employer promises to pay the deferred funds, plus any investment gain, to the employee at the specified time.
At the time of the deferral, the employee pays Social Security and Medicare taxes on deferred income in the same way as on the rest of his income, but he does not have to pay income tax on deferred compensation until he receives the funds. A deferred compensation plan, on the other hand, is much more restrictive as to when that deferred income is paid. These are the 7 questions to determine benefits and risks and determine if the deferred compensation plan is right for you. If you're designated a highly paid employee (HCE), a deferred compensation plan can be a lifesaver for retirement savings.
A deferred compensation plan is most beneficial when you can lower your current and future tax rates by deferring your income. A critical point about deferred compensation plans is that the employee doesn't “get the funds.” The possibility of forfeiture is one of the main risks of a deferred compensation plan, making it significantly less safe than a 401 (k) plan. Ideally, the time the person receives deferred compensation, such as when they retire, their total compensation will qualify for a lower tax bracket, leading to tax savings. IRS limits on deferred compensation: Members age 50 and older can catch up in the current calendar year.
The key is that the longer you have until you receive deferred income, the smaller amount you should defer, unless it is clear that deferring larger amounts has a tax benefit.