How a Deferred Compensation Plan Works in Missouri

A deferred compensation plan allows eligible employees to set aside part of their salary into an account that grows tax-free until retirement. Many public employees in Missouri can use these plans, often called 457(b) plans, to supplement pensions or Social Security. A financial advisor can help you answer questions about Missouri’s deferred compensation plan, and manage contribution limits, tax benefits and investment options for your retirement goals.

What Is a Deferred Compensation Plan?

A deferred compensation plan is a retirement savings option that allows employees to set aside a percentage or dollar amount of their pre-tax salary, and the money is invested in a variety of options, such as mutual funds, stocks or bonds. These funds grow tax-deferred, meaning you don't pay taxes on the contributions or investment earnings until you withdraw the money in retirement. This can also help reduce your taxable income during your working years.

Deferred compensation plans are often available to public employees, such as government workers, teachers and law enforcement personnel. If you are eligible for a deferred compensation plan, you can participate in the Missouri State Employees' Deferred Compensation Plan (MOSERS), which is a 457(b) plan specifically for state employees. Local government workers may also have access to similar deferred compensation plans.

Deferred Compensation Plan Options in Missouri

Missouri provides several deferred compensation plan options. These can offer a range of investment choices and include both traditional and Roth options. Here are three to consider:

• Missouri state employees' deferred compensation plan (MOSERS): This is the primary 457(b) plan available to Missouri state employees. MOSERS offers a range of investment options, including target-date funds , fixed-income funds and equity funds, allowing participants to tailor their investment strategy to their retirement goals and risk tolerance.
• Local government deferred compensation plans: Certain municipalities in Missouri may offer their own deferred compensation plans, typically under the same 457(b) structure. They often offer similar investment options, allowing employees to save for retirement while deferring income taxes.
• Roth 457(b) option: In addition to the traditional 457(b) plan, many Missouri employees have access to a Roth 457(b) option. With a Roth 457(b), contributions are made on an after-tax basis, but withdrawals in retirement are tax-free. This option can be advantageous for employees who expect to be in a higher tax bracket during retirement, as it allows them to pay taxes upfront and enjoy tax-free growth.

How to Make Withdrawals

Participants can begin withdrawing funds from a deferred compensation plan in Missouri upon reaching retirement age or separating from service. However, unlike 401(k)s or IRAs, 457(b) plans do not have early withdrawal penalties for participants who leave their employer before the age of 59½. This makes 457(b) plans more flexible for early retirees or those who change jobs.

Withdrawals are taxed as ordinary income , so it's important to plan for the potential tax impact. Participants can choose from several withdrawal options, including taking a lump sum, setting up periodic withdrawals or rolling the funds into another retirement account like an IRA. For participants who have a Roth 457(b) plan, withdrawals are tax-free, provided they meet the qualifying criteria. This includes having the account for at least five years and being over age 59½ when making withdrawals.

Compensation Fees

Compensation fees in deferred compensation plans are charged to cover the costs of managing the plan and providing related services. You should know how these fees affect your account balance, as they can reduce your overall savings over time. Here are three to consider:

• Administrative fees: Administrative fees are charged to cover the cost of maintaining the plan, providing account services and ensuring compliance with regulatory requirements. These fees are usually a small percentage of your account balance and are deducted automatically.
• Investment fees: Each investment option within the plan, such as mutual funds or target-date funds, has its own associated fees. Known as expense ratios , these fees cover the cost of managing the fund and vary depending on the investment type. Make sure you review these fees when selecting your investment options, as high fees can erode your savings over time.
• Advisory fees: Some plans may offer the option to work with a financial advisor or use an automated investment service. These services typically come with additional fees, but they can provide valuable guidance to help you optimize your retirement strategy.

Frequently Asked Questions

What Happens If I Leave My Job Before Retirement?

If you leave your job before retirement, you can take your deferred compensation plan with you. You can either leave the funds in the plan, roll them over into an IRA or another retirement account or begin taking withdrawals which will be subject to income tax .

How Much Can I Contribute to a Deferred Compensation Plan?

In 2024, the contribution limit for 457(b) plans is $23,000 . Employees aged 50 or older can also make catch-up contributions, increasing the limit by an additional $7,500.

Bottom Line

Missouri deferred compensation plans offer public employees a tax-advantaged way to save for the future. With both traditional and Roth 457(b) options, these plans can provide flexibility and potential tax benefits. Knowing the fees, withdrawal rules and contribution limits can help you maximize your plan and stay on track for financial security.

Retirement Planning Tips

• A financial advisor can help you create a personalized retirement plan for your needs. 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 calculator can help you get an estimate.

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