A deferred compensation plan looks like a 401k plan. You make deferrals, select investments and pay taxes upon distribution. Instead, the employee will pay income tax at the time of distribution. The employee usually remains locked in to distributions based on prior elections given to the company.

Is a deferred compensation plan an IRA?

Unlike with a 401(k) plan, when funds are received from a deferred compensation plan, they cannot be rolled over into an IRA account. Nor can deferred compensation funds be borrowed against.

Can you contribute to 401k and deferred compensation?

Financial advisors usually suggest using a deferred compensation plan only after having made the maximum possible contribution to a 401(k) plan—and only if the company an individual is employed by is considered very financially solid.

What taxes do you pay on deferred compensation?

Your company gives you the opportunity to defer up to 20% of your compensation over a 10-year period. If you take the income now, you will pay a 37% tax rate on $100,000 of income, for a total tax bill of $185,000. But if you defer until retirement, you could be looking at a 24% tax rate, for a tax bill of $120,000.

Does deferred compensation show up on w2?

Distributions to employees from nonqualified deferred compensation plans are considered wages subject to income tax upon distribution. Since nonqualified distributions are subject to income taxes, these amounts should be included in amounts reported on Form W-2 in Box 1, Wages, Tips, and Other Compensation.

Can a deferred compensation plan be used to supplement a 401k?

One reason deferred compensation plans are often used to supplement a 401(k) or an individual retirement account (IRA) is that the amount of money that can be deferred into the plans is much greater than that allowed for 401(k) contributions, up to as much as 50% of compensation.

Can a deferred compensation plan be changed at retirement?

Typically, deferred compensation funds cannot be accessed, for any reason, prior to the specified distribution date. The distribution date, which may be at retirement or after a specified number of years, must be designated at the time the plan is set up and cannot be changed.

What’s the maximum contribution to a deferred compensation plan?

The maximum allowable annual contribution to a 401(k) account, as of 2015, is $18,000, or $24,000 for individuals over the age of 50. Another advantage of deferred compensation plans is some of them offer better investment options than most 401(k) plans.

Can a deferred compensation plan be borrowed against?

Deferred compensation plans cannot generally be accessed and are a disadvantage in terms of liquidity. Unlike many 401 (k) plans, deferred compensation plans cannot be borrowed against.