Los Angeles Investment Club, Real Estate Blog

 

What Is Deferred Compensation?

These days it can be hard to save up money, so one way to do it is through a method that forces you to save even before you get paid. This type sabings is called deferred compensation. Deferred comp comes in several types, but basically it is an agreement between a company and an employee where part of their pay is deferred and will be paid out at a future date.

 

Common Types Of Deferred Compensation

One of the most common types of is a retirement plan. This is usually part of an employee’s benefits in their job that keeps adding up and is a form of investment or IRA in some cases. It would go to the employee when they either retire from the positon, or it usually can be transferred to a new job if it is an IRA. The value of a retirement plan type depends on how much money is held back from the person’s pay and what is done with it afterwards.

Deferred Compensation is defined as an agreement between an employer and an employee to withhold payments of wages, invest them on the employee's behalf, and pay them later to the employee in the form of retirement benefits. Deferred compensation eliminates the tax the employee would normally pay on their wages and can take the form of a pension, retirement plan, or employee stock option plan.

Every month, an employee expects to earn some income in the form of wages. While some take all of it home, others choose to keep a portion of it with the company's retirement savings plan. In most mid-sized companies, employers purchase an annuity, offer stock options, or some form of pension. These retirement plans are normally designed to replace 60% of your working income after 30 years with the same employer. Just like one would wish to save for the future, deferred compensation is a retirement plan that allows people to avoid the taxes associated with receiving their income right away. Most companies or employers in the USA encourage employees to subscribe to retirement plans.