How Deferred Compensation Works in Wisconsin

Deferred compensation plans allow employees to set aside part of their income to be paid later, often during retirement when they may be in a lower tax bracket. They are commonly used in Wisconsin by public sector workers. Though these plans are also available to private sector employees. A financial advisor can help you compare different types of plans, such as 457(b), and explain the rules that apply.

How a Deferred Compensation Program Works in Wisconsin

The Wisconsin Deferred Compensation Program (WDC) offers employees a strategic way to save for retirement by allowing them to set aside a portion of their salary aside to be paid out at a later date, typically upon retirement.

These programs are particularly beneficial for individuals looking to lower their taxable income during their working years. You can opt for before-tax contributions where you pay tax only when you withdraw the funds. This can result in significant tax savings as you may qualify for a lower tax rate, making it especially beneficial for those in higher tax brackets.

In Wisconsin, the most common type of deferred compensation plan is the 457(b) plan , which is available to state and local government employees, as well as certain non-profit organization workers.

To participate in a deferred compensation program in Wisconsin, employees typically need to enroll through their employer. The enrollment process involves selecting the amount to be deferred from each paycheck and choosing investment options that align with their financial goals and risk tolerance .

Contribution limits are set by the IRS and can vary annually, but generally, employees can defer up to a certain percentage of their salary or a fixed dollar amount, whichever is less. It is important for participants to regularly review their contributions and investment choices to confirm that they stay on track with their retirement objectives.

Withdrawals from a deferred compensation program in Wisconsin can happen any time but are subject to the appropriate taxes. They are commonly taken upon retirement, termination of employment or in certain cases of financial hardship. When you turn 72 , you will be contacted with information regarding requirement minimum distributions (RMDs) for your Wisconsin deferred compensation plan.

How Much to Save in a Wisconsin Deferred Compensation Plan

The IRS sets contribution limits and can vary annually, but generally, employees can defer up to a certain percentage of their salary or a fixed dollar amount, whichever is less. However, there are limits regarding how much you can save in a Wisconsin deferred compensation plan.

Most individuals have a limit of $23,000 in 2024, but there are some exceptions:

• Individuals 50 years or older are permitted to add a catch-up contribution of $7,500 in 2024, totaling a maximum contribution of $30,500.
• Those within three years of retirement age can use a loophole called the special catch-up contribution, allowing you to save an additional $23,000 to create a total contribution of $46,000 in 2024.

Benefits of Deferred Compensation Plans

Deferred compensation plans provide a strategic way for employees to manage their income and savings. By deferring part of their salary to be paid later, often during retirement, employees can gain both short- and long-term benefits. Here are four common benefits to keep in mind:

• Tax advantages . One of the primary benefits of deferred compensation plans is the potential for tax savings. By deferring income, employees can reduce their taxable income in the current year, potentially lowering their tax bracket. This deferred income is then taxed at a later date, often when the individual is in a lower tax bracket, such as during retirement.
• Retirement savings boost. Deferred compensation plans can serve as an additional retirement savings vehicle. Unlike traditional retirement accounts, there are typically no contribution limits, allowing high earners to save more for retirement. This can be particularly beneficial for those who have already maxed out contributions to other retirement accounts like 401(k)s or IRAs .
• Financial flexibility. These plans offer flexibility in financial planning, allowing employees to tailor their income stream to meet future needs. Participants can often choose when and how they receive their deferred compensation, providing a customizable approach to managing future cash flow. This flexibility can be beneficial when planning large expenses or managing income during retirement.
• Employer incentives: Employers often use deferred compensation plans as a tool to attract and retain top talent. By offering these plans, companies can provide a competitive edge in their benefits package, which can be appealing to employees looking for long-term financial security. This can lead to increased employee loyalty and reduced turnover.

Potential Cons of Deferred Compensation Plans

Like with other retirement strategies, Wisconsin deferred compensation plans can also come with potential drawbacks. Here are four to keep in mind:

• Lack of immediate access to funds. One of the primary disadvantages of deferred compensation plans is the inability to access funds immediately. This can be problematic if unexpected expenses arise, as the money is typically locked away until a specified future date or event, such as retirement. Instead, plan on having other liquid assets available to serve as an emergency fund .
• Risk of employer insolvency. Deferred compensation plans are often tied to the financial health of the employer. If the company faces financial difficulties or bankruptcy, you may lose the deferred funds. Unlike qualified retirement plans, these funds are not protected by the Employee Retirement Income Security Act (ERISA) , making them more vulnerable in such scenarios.
• Potential tax implications. While deferring compensation can offer tax benefits, it may also lead to higher tax liabilities in the future. If you defer a significant amount of income, you could find yourself in a higher tax bracket when the funds are eventually paid out. It is important to consider how this might impact your overall tax strategy.
• Complexity and administrative costs. Deferred compensation plans can be complex to set up and manage, often requiring legal and financial expertise. Additionally, the program fees and administrative costs associated with maintaining the plan can eat into the benefits. You should weigh these costs against the potential advantages.

Bottom Line

Deferred compensation plans can allow employees in Wisconsin to set aside part of their earnings to be paid out later, often during retirement, which can offer tax advantages. Employers in Wisconsin often offer deferred compensation plans to attract and retain talent, giving employees a flexible way to manage their income and retirement savings.

Tips for Retirement Planning

• A financial advisor can help you create a personalized retirement plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to know how much your retirement savings could grow over time, SmartAsset's free retirement calculator could help you get an estimate.

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