Embed construction in the Deferred Compensation Plan

Aug 6th, 2022
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How to embed construction in the Deferred Compensation Plan

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if you have a 457b retirement plan through work then youve got something special on your hands and in this video Im going to explain how the 457b retirement plan compares to a 401k individual retirement account or other common retirement savings options and then were going to talk a little bit about how to make the best use of this account type as you prepare for your retirement [Music] welcome my name is Eric amsilog I am the owner and head financial planner at Peak financial planning thank you for taking the time to watch this video were a fee only fiduciary financial planning practice located in Southern California and we help people make better money decisions and find peace with their finances so stay tuned were going to be talking all about the 457b and how you can use that to its maximum effect in your retirement planning so a 457b is a tax advantage retirement savings plan and in many ways its very similar to more common things like the 401K plan or even a tsp or a 403b p

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Deferred compensation plans allow employees to withhold a certain amount of their salaries or wages for a specific purpose. Deferred compensation plans can be qualified or non-qualified. Qualified plans fall under the Employee Retirement Income Security Act and include 401(k)s and 403(b)s.
In general, deferred compensation plans allow the participant to defer income today and withdraw it at some point in the future (usually upon retirement) when taxable income is likely to be lower. Like 401(k) plans, participants must elect how to invest their contributions.
Deferring income to retirement might help avoid high state income taxes (ex: California, New York, etc) if youre planning to move to a low-tax state. The biggest risk of deferred compensation plans is theyre not guaranteed; if your company goes bankrupt, you might receive none of the income you deferred.
Deferred compensation plans are funded informally. Theres essentially a promise from the employer to pay the deferred funds, plus any investment earnings, to the employee at the time specified. In contrast, with a 401(k), a formally established account exists.
A 401(k) has an edge when it comes to regular contributions, since employer matches dont count against your annual contribution limit. But if you have a 457 plan, you could benefit from the special catch-up contribution provision which you dont get with a 401(k).
Disadvantages of Deferred Compensation With a deferred compensation plan, you are effectively a creditor of the company, lending the company the salary you have deferred. If the company declares bankruptcy in the future, you can lose some or all of this money.
Depending on your plan provisions, the payment of the deferred compensation can also be structured to reduce your tax liability based on a series of installment payments or lump sum payments based on a specified time. By spreading out the payments, you potentially could reduce your income for each applicable year.
A deferred compensation plan withholds a portion of an employees pay until a specified date, usually retirement. The lump sum owed to an employee in this type of plan is paid out on that date. Examples of deferred compensation plans include pensions, 401(k) retirement plans, and employee stock options.

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