Unlike a traditional pre-tax deferred compensation plan, the Roth deferred compensation option allows you to contribute money after taxes, but then withdraw tax-free dollars from your account when you retire. By having a combination of Roth IRAs and deferred compensation accounts, you can manage your tax situation more effectively. If you want to reduce your taxable income in a given year, you can withdraw more money from a Roth IRA and less from deferred compensation arrangements. If it makes sense to accelerate your taxable income, you can do the opposite.
Either way, having both types of retirement savings available gives you options you won't get on your own with one or the other. While both 457 plans and Roth IRAs offer tax advantages, they are the exact opposite in terms of when you get tax relief. If tax rates are substantially higher when you retire, you'll benefit significantly from your Roth IRA because your withdrawals will be tax-exempt. The idea behind deferred compensation and deferred compensation plans are designed to allow workers to protect income from taxes.
With so many ways to accumulate your savings, deciding where to invest your money can be difficult, but it's possible to save for retirement in several accounts, including 457 plans and Roth IRAs. The main advantage of unqualified deferred compensation is that it is not subject to the contribution limitations of 401 (k) plans and similar accounts. They're similar to 401 (k) plans, but they come with their own rules and tax advantages that eligible investors should consider before starting to participate. Technically, employer-sponsored retirement plans, such as 401 (k) accounts, which are also known as qualified plans, are a form of deferred compensation.
Choosing a retirement savings plan can seriously affect your after-work finances, and some workers should consider combining deferred compensation and Roth IRA savings to meet their goals. Roth 457 (b) contributions can replace or supplement traditional pre-tax contributions, subject to IRS limits. With a Roth IRA, you don't get an upfront tax break, which means you pay your taxes when you make the contribution. Non-qualified deferred compensation plans usually have requirements such as the minimum length of stay in a job and, if the company goes bankrupt, the assets of the unqualified plan are subject to creditor claims as are other assets.
But what if you can contribute to both? If you're eligible for a Roth IRA and a 457 plan, there are some important factors to consider before making your contributions. How Roth IRAs fit In both unqualified deferred compensation plans and traditional 401 (k) plans, contributions are excluded from taxable income at the time of the initial contribution. Some workers have access to several types of deferred compensation plans during their careers, and most workers can also use a Roth IRA to save for retirement on their own.