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This question is about salaries.
How is deferred compensation taxed?
Deferred compensation is taxed when it is distributed or made available to the employee. This means the tax is not applied at the time the income is earned, but rather at the time it is received by the employee.
Typically, deferred compensation plans are designed in a way that allows employees to defer a portion of their salary or bonus into these plans. The key benefit to deferred compensation plans is that the money deferred in these plans are not subjected to income tax until they are withdrawn or distributed, This usually happens upon retirement or leaving the company, and it allows for potential tax savings if the employee's tax rate at the time of distribution is lower than it was at the time of deferral.
While deferred compensation can offer significant tax advantages, there can also be drawbacks. For instance, once a deferral election has been made, it generally cannot be changed and the deferred amounts cannot be accessed until a specified date or event such as termination of employment, disability, death or an unforeseen emergency.
All in all, deferred compensation can be a valuable tool for tax planning and retirement savings, but it's always important to understand how these plans work and their potential implications on your overall financial situation.
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