What is the difference between a 401k and a deferred compensation plan?

The informal nature of deferred compensation plans puts the employee in the position of being one of the employer’s creditors. A 401(k) plan is separately insured. By contrast, in the event of the employer going bankrupt, there is no assurance that the employee will ever receive the deferred compensation funds.

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Correspondingly, what type of retirement plan is deferred compensation?

A nonqualified deferred compensation plan is a type of retirement plan that lets select, highly compensated employees enjoy tax advantages by deferring a greater percentage of their compensation (and current income taxes) than is allowed by the IRS in a qualified retirement plan.

Moreover, are deferred compensation plans a good idea? Deferred compensation plans can be a great savings vehicle, especially for employees who are maximizing their 401(k) contributions and have additional savings for investment, but they also come with lots of strings attached. … Like 401(k) plans, participants must elect how to invest their contributions.

Hereof, how is deferred compensation paid out?

Deferred compensation plans don’t have required minimum distributions, either. Based upon your plan options, generally, you may choose 1 of 2 ways to receive your deferred compensation: as a lump-sum payment or in installments. … However, you will owe regular income tax on the entire lump sum upon distribution.

How does deferred comp work when you retire?

A deferred compensation plan withholds a portion of an employee’s 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, retirement plans, and employee stock options.

Can I withdraw money from my deferred compensation plan?

You can take the distribution in a lump sum or regular installments, paying tax when you receive the income. You can also arrange to withdraw some of it when you anticipate a need, such as paying for your kids’ college tuition. While the IRS has few restrictions, your employer will probably have their own rules.

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