When it comes to saving money for retirement, you have a variety of options. Some of these options are available only through an employer, including deferred compensation retirement accounts. Though a deferred compensation retirement account is similar to other retirement accounts in many ways, it does not provide a tax benefit on your income tax form like some other types of accounts. The tax benefit is already built into the plan.
How It Works
A deferred compensation retirement account provides a means to save for retirement, or future expenses, using money earned through your current employment. If you have a deferred compensation retirement account through your employer, you can elect to have a portion of the money from each paycheck, or from any bonus checks you receive, diverted into the account. The money is automatically deducted from your pay and added to the total on your deferred compensation account.
The Tax Benefit
When it comes time to fill out your income tax return each year, you should not consider your deferred compensation retirement account as long as you are still putting money into the account. You do not get any kind of tax benefit on your income tax return for adding money to the deferred compensation account. Since a deferred compensation retirement account is funded with pre-tax income, you do get the benefit of delaying the taxes on the income, which allows the money in the account to earn additional interest.
Not every company offers deferred compensation retirement accounts and not every individual in a company is eligible for the deferred compensation account even if a company does offer this type of retirement plan. Deferred compensation retirement counts are generally available to all levels of government employees, but to only top level employees, usually executives, in private corporations.
Pros and Cons
Aside from the advantage that the account is funded pre-tax, a deferred compensation account has no annual limit of how much money you can save, other than that which may be imposed by an employer, which allows you to save more money each year. The main disadvantage of a deferred compensation account, however, is that the money in the account is tied to the corporation’s finances. If the company goes bankrupt, so does your retirement account.