Deferred compensation refers to a tax-deferred supplemental retirement strategy an employee pays into while working and collects after retirement. The purpose of deferred compensation is to provide employees with a convenient way to save on a regular and long-term basis, thereby providing for their retirement. For employees who are members of a pension plan, deferred compensation offers savings to supplement their pension.
The City of Akron has four voluntary deferred compensation plans that are available to employees. All are qualified Section 457 plans (designated by the IRS) and receive favored tax treatment.
Under a deferred compensation plan, a flat dollar amount or percentage, that you determine, is deducted from your paycheck on a pre-tax basis. The amount of income that can be tax deferred is subject to IRS limitations.
Both federal and state income taxes are deferred on your deposits and interest/accumulation until you withdraw funds from your retirement account. Once distribution begins, the distributed monies are fully taxable as ordinary income for federal and state tax purposes. However, at retirement, most people will not have as much taxable income, so the tax rate is often less than the tax rate while the employee is working.
Employees may elect to participate in a Section 457 deferred compensation plan and employees may elect to participate in one or up to all four of the service providers for investment selection and fund administration.