Deferred Compensation Abstract Deferred compensation is a big part of our every day lives. From education to retirement and everywhere in between we need to make sure that we are using funds that we get in the best way possible. Compensation plans have very nice tax benefits which could mean either tax free when we withdraw the funds or tax free when we contribute the money into the account(s). Some employers help us to save money for our future by matching our contribution(s) in a percentage of some form. Besides thinking of these plans as being beneficial there are certain drawbacks such s costs.
Besides the costs as a drawback of a plan there is also potential for becoming a victim of fraud. Bankruptcy of our employer is a potential drawback to contributing money into one of these plans, but that doesn’t happen very often. Everyone needs to utilize these plans to be able to have a comfortable retirement. As we all are (or already have) venture into the working world it is very important that our retirement plans be in the back of our minds each and every day. Retirement is inevitable, that is, unless you are poorly prepared for the event. Leading up to etirement is our life of work.
During all of our years of employment we need a way to save money to be able to retire comfortably where we won’t wake up each day and worry if we are going to have enough money until the end of the money to pay all of our bills and be able to eat properly. Instead of relying on ourselves to be our own money handlers, we can rely on our places of employment. If we had to rely on our own money saving ability to save for our retirement I can pretty much guarantee that America would be in a lot worse shape, economically, that it already is these days.
Most companies in the United States offer deferred compensation plans to their employees that aid in the saving for our retirement. Deferred compensation is the amount of earned income that is payable to an individual at a later date. Most of the time, deferred compensation plans allow the person who earns the wages to defer the taxes of their income now so that when the funds are dispersed in the future they can be taxed then. Is this a good idea or a bad one? It all depends on the situation.
You may be in a low tax bracket now and be taxed at one percentage if you take your money now and want to save it outside of a ompensation plan. Or, if you wait until a later date you may be bumped up into a higher tax bracket depending on how much money you are making then because generally we all make more money towards the end of our employment due to more experience and other factors. Or, it could be the other way around, get taxed a lot now if you decide to take your money out to save yourself and get taxed on less because something happened in your life and you are making less money now than when you started saving.
You could actually be better off deferring your income in a compensation plan instead of taking it now. Deferred compensation plans are widely used in the United States by many employers and even individuals who are self employed may also take advantage of these plans. There are many different types of deferred compensation plans. Each one of the plans are an essential part of our lives because it ensures that we have enough money to survive when it is time to stop working. We all need to make sure that we are going to be able to live in a way suitable to our needs when we are at our retirement age.
I’m sure none of us want to wake up one morning thinking it’s our irst day of retirement only to learn we haven’t saved enough money to be able to do Some types of deferred compensation come from retirement plans, pension plans and stock-option plans. Putting money into any of these types of accounts helps to assure that when you retire you have more money to live off of than Just the social security you will receive (hopefully. ) If you start to put away a percentage of your money when you’re young into a 401 K plan or pension plan you are setting yourself up for a nicely funded retirement.
The money that you put away can be invested into he stock market where you could make a lot of money before you retire or you can actually lose money too. Of course there are risks involved in investing your money between now and retirement and if your employer also offers to match some of the money you put into your account it could help you out even more. Many employers match up to a certain percentage of the money that you contribute to your plan. For example, I work for PepsiCo and for every dollar I contribute to my 401 K, my employer contributes fifty cents up to four percent of how much I put in each week.
This has een an amazing asset to my life because I have a pretty good lump of money waiting for me that has been building up over the past eight years. It Just keeps growing and growing. Having your money in deferred compensation plans is a great way to make sure you’re going to be able to live comfortably when you retire but there are also a few drawbacks. There are many different limits on the contribution to the plans and on the benefits that may be paid under the plans. Some of the drawbacks are against the employee and some are against the employers.
For employers there are other rawbacks such as the cost of start up and the administrative costs that go along with the contribution plans. Most plans have requirements that you must meet in order to qualify to participate in a particular plan. A qualified plan should benefit the employee. Generally, for most plans you must be the age of 21 with a year (or one thousand hours accumulated over a twelve month period) to qualify to participate in a plan. Many companies that hire individuals to work part time do not offer them any type of deferred compensation plan.
This is quite sad, but the start up and administrative osts that go along with a plan such as these remains too costly to operate for those employees who do not work at least forty hours a week. There are many concerns of individuals about the use of these retirement plans and if they’re actually worth it to them. There are so many questions that many think about and it can become overwhelming to someone who isn’t educated clearly on all of the different topics surrounding retirement plans.
Many people ask if they will be able to live the way they are now when they retire or will it feel like since they have retired they are living from paycheck to paycheck? Another concern is with higher medical bills as they age and every day costs of living rising, will they outlive their retirement savings. Another big concern is what happens to their money with the cost of inflation usually increasing as years go by. These are very important questions that people are worried about all of the time.
Less than half of the people who are participating in retirement plans are confident that right now they are saving enough money from each check to be able to live comfortably when they retire. Most of them are wrong. It is suggested (at least by he company my 401 K is with, Fidelity) that you should be saving at least twenty percent of your income now to be able to retire comfortably. If you enroll as soon as you are eligible you will most likely save more than enough money to fund your retirement.
If you don’t enroll in a retirement plan or if you aren’t putting in enough you might be receiving more money each week now (which is always nice) but by the time you retire that will be another story. One thing to be wary of when signing up for plans you think may help you such as a cafeteria plan or a health savings plan (health care reserve plan. These plans are usually tax free which seems like a great benefit to anyone, especially if the employee or their family members in which they cover are in need of expensive medical care.
You can calculate an estimated amount of how much money you should save for the year and then as you need medical bills they take it right out of your reserve (or reimburse you after you have paid the bill. ) Seems great right? It is a pretty nice option to have all of your medical expenses paid for tax free but the only downfall is that if you dont use all of the money you allocated that year, you lose it (in most lans. Finally though, some of the plans now actually roll over the money you haven’t used in the year you wanted it saved for. Now that kind of sounds unfair since technically you’ve earned this money by working for your company. I’ve never understood that part of the health savings plan. (wrww. treasury. gov). There is a perk of having a retirement plan that I have actually taken advantage of a couple of times that I think really helps out if you’re in a bind. Some plans let you borrow money from them. Usually you must pay the money back with interest. The interest is very minimal though.
Generally you pay the loan in the number of months you sign up for in your contract and the best part is, it comes right out of your paycheck so there is pretty much no way to default on your loan. The plan has specific guidelines as to how much money or how many loans you can have outstanding at a specific point in time depending on how much money you have in your account. It is an awesome tool if you don’t want to take out a high interest loan from your bank. I’ve actually used my 401K to fund a loan to pay for the balance of my tuition and books for the year.
It’s nice that they only take out about thirty dollars week so it isn’t very noticeable. The only downside to using your 401 K to fund a loan is the amount of money you are borrowing comes out of your plan until it is paid back so that money isn’t invested in anything and therefore not making you any money. There are many decisions that go into taking out a loan from your 401K, but it is a nice option. (www. fidelity. com. ) If you are experiencing a hardship where you are in desperate need of money and you think that going to one of those pay day loan places is the answer, think again.
You can partially and fully withdraw your 401 K account and pretty much start over. You must provide substantial paperwork for this action and maintain that paperwork in case the IRS contacts you that you are going to be audited. Also, if you leave your current place of employment where you have your 401 K account you can either take it with you to your next Job, if applicable, or you can close your account out by taking the money (which will be taxed) or keep it closed and save it for your retirement. Another type of account you can venture into is an IRA (Individual Retirement Account. An IRA is an account that is available at different financial institutions. An IRA is available to people who are not covered by another qualified plan and wish to establish their own tax deductible account elsewhere. Also available besides the traditional IRA is a Roth IRA that is almost the same as the original except for the fact that it is nondeductible. What about fraud? Does it seem as though your money is safe in a retirement account and that you will receive it when you retire? If you’re vigilant and check your statements regularly then you are probably safe.
But, there are times where people may lose their entire life savings in an instant. Some people who are not educated on etirement plans or people who are getting older and they arent up with the times may be subject to a Ponzi scheme or some other type of fraud. It’s sad to know that there are individuals out there who will call up an older person and try to get them to hand over their life savings in an investment project guaranteeing them one hundred percent return on their investment when all that happens is the person disappears with their money and the poor victim is left penniless.
Our older citizens need to be educated especially as the technology these days keeps becoming more advanced than the day before. You can hire a financial adviser to help you with your financial decisions and how to invest your savings but you have to be extra careful that the person you are hiring is a trustworthy individual. Another thing to worry about when it comes to your retirement is bankruptcy. Bankruptcy is a big deal whether it is bankruptcy of the employee or bankruptcy the employer.
If an employee files for bankruptcy some of their savings in a retirement may be salvaged. They will only be permitted to maintain the amount they need to retire. If the employer files for bankruptcy though, all of the money goes directly to he employer’s creditors. As with older people, everyone needs to be educated on the volatility of the money they have invested within a company. We must all be cognizant of what is going on with the company from their day to day operations all the way through their yearly financial statements.
If a company’s financial statements start to show that they may be having financial trouble in the past year or coming up in the future it may be wise to check how much money you have invested and think about selling what you have. After you research other companies you can then use he money to invest in another company that you think may be a better choice to use for your retirement. Besides using a deferred compensation plan for retirement, you could also have one for your educational needs.
The Coverdell Education Savings Account (CESA) is an account for a beneficiary to withdraw money tax free for their educational expenses. There is a $2,000 a year maximum contribution amount into this account from the time the beneficiary is born until they reach 17 years of age. The contributions to this account are not deductible on your income tax return. The beneficiary must use all of he money in the account by the time they reach thirty years and thirty days old.
If they do not use it all they can roll it over into another CESA account for a different member of the beneficiary’s family who is under the age of thirty years old. If there’s one thing that we can all learn from working all of our lives and looking at the economy is that we need to save every penny we possibly can afford to now to be able to retire at a reasonable age, later. When you’re young you think you have so much time because it seems like an eternity before it’s time to retire, but in reality, you really don’t, it’ll sneak up on you fast.
Deferred compensation plans are the best way to save up for your retirement. If you’re conservative with how you invest your money you could end up living a luxurious life once retirement starts. We must always be aware of people trying to commit fraud against us since we have money that is waiting for us in the future. The best way to get into a retirement plan is through an employer, especially if they are willing to match what you are contributing – every penny helps. It cannot be stressed enough that everyone should start in one of these programs as soon as they are qualified to get into one.
Deferred compensation plans are extremely beneficial especially because most of them are at some point tax free whether it is contributing the money to them or withdrawing the money at a later date. Works Cited mw. ‘. treasury. gov. (2003, October 18. ) (http://www. treasury. gov/resource-center/ faqs/taxes/pages/health-savings-accounts. aspx. ) http://www. irs. goWRetirement-Plans/lRC-457(b)-Deferred-Compensation-Plans www. fidelity. com http://www. nytimes. com/2009/05/09/your-money/09money. html? r=O http://www. forbes. com/sites/robertwood/2013/03/1 5/got-deferred-compensation- beware-section-409a/