A portion of an employee’s pay is held away to be reimbursed at a later period, known as deferred compensation. Taxes on this income are usually delayed until it is paid out. Retirement plans, pension plans, and stock-option programs are all examples of deferred compensation.
High-income employees who wish to save for retirement might consider delayed compensation plans. These plans, like 401(k) plans and IRAs, grow tax-deferred, and contributions can be deducted from taxable income in the current year. A deferred compensation plan, unlike a 401(k) or an IRA, has no contribution restrictions, so you can save up to your entire annual bonus as retirement income.
However, there are certain disadvantages. Unlike a 401(k), you are effectively a creditor of the employer with a deferred compensation plan, lending them the money you have delayed. You could lose part or all of this money if the company goes bankrupt in the future. Even if the company is stable, your funds are at risk.
Also, See: Discrimination
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