Saving for the future is important, but it can also be daunting. We want to make it as easy as possible, so in addition to our primary retirement plans, we offer voluntary deferred compensation plans as another way to plan for what’s ahead in life.
Deferred Compensation Plans - 403(b) and 457(b)
About the benefit
Employees are eligible to participate in supplemental tax-sheltered investment programs through the payroll deduction method as authorized under Section 403(b) and Section 457 of the Internal Revenue Code. Employees may participate in both a 403(b) program and the State of Missouri Deferred Compensation Plan (457 Plan).
These investment plans allow employees to save for retirement either on a tax-deferred basis or after-tax (Roth). Since the reportable income received at retirement is likely to be less than their income while working, they usually gain a tax advantage.
If contributing on an after-tax basis (Roth), in general employees do not pay taxes when receiving benefits since taxes have already been paid. Therefore, the Roth IRA's tax break is granted on the money withdrawn from the plan during retirement.
Why contribute to a deferred compensation plan?
Participating in the plan can provide a number of benefits, including the following:
- Lower taxes. Employees may contribute before income taxes are withheld, which means they are taxed on a small amount.
- Tax-deferred growth and compounding interest. Interest and earnings accrue tax deferred. That means interest on the interest also grows tax deferred. The compounding interest can allow the account to grow more quickly than saving in a taxable account where interest and earnings may be taxed each year.
- Planning for the future. Other sources of retirement income, including state pension plans and, if applicable, Social Security, rarely replace a person’s final salary upon retirement.
403(b) versus 457(b) plans
Investment options also vary. 403(b) investment options differ according to the provider selected. 457(b) investments are directed into specific types of funds.
403(b) plans offer loans under certain circumstances. They do not offer a pre-retirement “catch-up” option. 457(b) plans do not offer loans, but a pre-retirement “catch up” provision may be available.