When it comes to taxes, the higher your income, the more you pay. If you’re employed and you are provided with the option of deferred compensation, the best option is to weigh the pros and cons to decide if it will work for you or not.
Qualified Versus Non-qualified Deferred Compensation
A deferred compensation plan allows a portion of your income to be paid in the future, thus reducing the amount you will pay in taxes. Deferred compensation plans are known as either qualified or non-qualified.
A qualified compensation plan, such as a 401(k), allows employees to fund retirement with pre-tax contributions that are placed in an investment account for future withdrawal. Employers receive tax breaks for contributing to qualified compensation plans, and many employers match employee contributions. A qualified deferred compensation plan is generally independent of the sponsoring company. Importantly, there are limits to how much an employee can contribute to a qualified compensation plan.
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