Deferred Compensation Accounts
Saving more with a 457(b) account
People use the term “deferred compensation” when talking about certain types of retirement savings accounts because when you have money taken out of your paycheck to put in one of these accounts, you are effectively deferring the compensation you would have received today while you work until later, usually saving it for when you retire.
Usually the money is take out before taxes, which means that saving for retirement lowers your tax liability, which is the amount of your income that you pay income taxes on. You pay less taxes now.
When you retire and begin withdrawing money from these accounts to pay for your life in retirement, that will be considered income, and you’ll have to pay income taxes then because you didn’t pay income taxes on that money yet. But this is very often quite advantageous to you for 2 reasons:
- Your income will likely be lower in retirement, which means you’ll probably be in lower tax brackets and pay at lower rates than if you would have had to pay income taxes on receiving that same money while you were working.
- Because you don’t pay income taxes on your money yet, this leaves a higher balance in your retirement savings accounts to be exposed to the power of Compound Interest. Compound interest can be thought of as “interest on interest” which will make your money grow at a faster rate than simple interest (which is calculated only on the principle amount). Over time, this gives you the potential to earn more money than if you had paid income taxes on that income initially.
Types of “Qualifying” Deferred Compensation Accounts
Qualifying deferred compensation plans are pension plans governed by the Employee Retirement Income Security Act (ERISA), including 401(k) plans, 403(b) plans and 457 plans. An organization that has such a plan in place must offer it to all employees (though not to independent contractors). Qualifying deferred compensation is set off for the sole benefit of its recipients, meaning that creditors cannot access the funds if the company fails to pay its debts. Contributions to these plans are capped by law.
Your Deferred Compensation Account Options
Options For Saving Through Payroll Deduction
As public employees, you have access to open deferred compensation accounts to save money for retirement. Depending on which ACERA participating employer you work for, your options are as follows:
|Options For Saving Through Payroll Deduction|
|You Work For||Your Options||Account Administrator||How to Get More Info or Sign Up|
|457(b)||Prudential||More info and sign up here.|
|First 5 Alameda County||457(b)||Prudential||Sign up with and get more info from Lyssa DeGolia.|
|The Superior Court||457(b)||Prudential||Sign up with Dwana Black. More info here.|
|Alameda Health System||
|Prudential||Check out Investopedia for a comparison of 457(b) and 403(b). Get more info and sign up with Alison Drummer.|
|Livermore Area Recreation and Park District (LARPD)||457(b)||MassMutual||Sign up with Julie Dreher. Contact David McCray for more info.|
|Housing Authority of the County of Alameda||457(b)||ICMA-RC||Sign up with your Human Resources Department. Contact Habib Mbye for more info.|
Just like putting your money in a 457(b) account, there are a variety of other types of retirement savings accounts approved by the IRS. When you put your money in these accounts, you choose the types of investments that your money goes to, and therefore, you choose the amount of risk you are willing to take with your money. Many of these types of accounts will allow you to split your money among low and moderate risk options; for example, you could choose to put part of your money in FDIC-insured CDs, part of it in U.S. Treasury Bills, and part of it in Mutual Funds.
Many banks and investment managers will help you set up a periodic automatic transfer from your checking account to your other deferred compensation accounts. You can even set it up so that it happens on payday so you won’t even see the money in your checking account because it will just go straight into your account.
See our page on Stress-Free Retirement Planning for more information.