Dave Says...What’s the Deal with Deferred Comp?

Dear Dave,

I work for a fire department in Mississippi and I’ve been trying to get information on the state’s deferred comp plan. No one here seems to know a lot about it, so I was wondering if I should keep looking for information or is it not worth the bother?

Brandon

Brandon,

Deferred comp simply means you are electing to defer and receive a portion of your compensation at a later time or date. People who use these types of plans have a portion of their compensation withheld and directed into an investment of some kind instead, and you aren’t taxed on it immediately. It’s sort of like a pre-tax investment, but it’s not transferable to an IRA or 401(k).

I would only do deferred compensation after I’ve done everything else in terms of saving 15 percent of my income for retirement, including a Roth IRA. These are funded by after-tax dollars, but they grow tax-free. I wouldn’t do any of this until after I had paid off all my debt, except for my home, and had an emergency fund of three to six months of expenses in place.

Good question, Brandon!

—Dave