Taxes

• The contributions companies make into deferred compensation accounts are not taxable until the money is withdrawn, which enables all capital and earnings to accumulate at a faster rate, with the goal of providing a secure retirement. The exception is the Roth IRA, for which recipients must pay taxes at the time of contribution. The withdrawn money, dividends and interest in a Roth IRA are then 100 percent tax-free. This type of account is only available to individuals earning up to $95,000 annually, or $150,000 for couples. Employers also benefit from the ability to take deductions at the time they contribute to these plans.
  
  

Earnings

• Deferred compensation plans allow earnings to compound, a scenario in which interest and dividends add to capital, which yields higher returns because of the increased principal. Participants generally have a choice of the type of investments they prefer, so more conservative investors may invest in Treasury or A-rated corporate bonds, or stable mutual funds. Those seeking higher returns may choose stocks and options, which can significantly increase returns but may also lead to crippling losses with a decline in stock values or adverse option trades.
  
  

Retirement Planning

• The prospect of a secure retirement is the primary benefit of deferred compensation plans. They also provide considerable flexibility in the types of investments as well as times of withdrawal. Internal Revenue Service rules permit withdrawals as early as age 59 1/2, with a requirement that they begin by age 70 1/2. Account holders can decide the ideal time to retire, in addition to knowing how their monthly withdrawals will balance against expected living expenses. Additionally, money can be withdrawn earlier for hardship or medical reasons with no penalty.
  
  

Verdict

• Deferred compensation plans usually are worth the preparation, paperwork and planning. A slice of annual salary typically is a small price to pay for the ability to maintain lifestyles, keep cars and sleep soundly in warm sheets. Individuals pay taxes on withdrawals from tax-deferred accounts at lower rates than ordinary earned income, which minimizes that burden as well. For those seeking to enjoy the fruits of retirement, these plans make financial sense for most people.