What's The Deal With Deferred Comp?

Brandon is saving for retirement, but doesn't know where deferred compensation from his job fits in.

QUESTION: Brandon has worked for a fire department in Mississippi for 7 years. He wants some information on the state deferred compensation program, but nobody who works there can tell him anything about it. Should he try to get more information on it, or is it something he even needs to bother with?

ANSWER: Deferred comp simply means we are deferring some of our compensation. Because you’re not receiving your compensation today and it sits over in some investment instead, you don’t get taxed on it today. It’s kind of like a pretax investment, but it’s not transferable to a 401k or an IRA. It also sounds like, in this case, you have no control over where the money goes.

My opinion on deferred compensation is that I would only do that after I’ve done everything else. I would first do a Roth IRA, which is funded by after-tax dollars but grows tax-free. I also wouldn’t do any of that until you’re out of debt and have an emergency fund in place.

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