How Deferred Compensation Works in South Carolina

South Carolina offers a deferred compensation program that allows public-sector employees to set aside a portion of their income to be paid out at a later date, typically during retirement. Contributions are often made pre-tax, which can lower current taxable income and provide potential tax benefits. Teachers, government workers, and other public employees can use this option to save for retirement flexibly, with the added benefit of potentially lowering their overall tax liability by withdrawing funds when they are in a lower tax bracket.

A financial advisor can help you navigate the ins and outs of retirement planning.

About the South Carolina Deferred Compensation Program (SCDCP)

The South Carolina Deferred Compensation Program offers employees of public institutions, including state and local government workers, teachers and public health employees, the opportunity to save for retirement through tax-advantaged plans. These plans, which are voluntary, allow eligible employees to defer a portion of their income to be paid out in the future, often after retirement.

Eligible employees can begin participating in the South Carolina Deferred Compensation Program as soon as they begin receiving compensation for their public service roles. This flexible savings option allows for strategic financial planning and can complement other retirement benefits like pensions and/or Social Security.

What Retirement Plans Are Available?

Two primary types of plans are available through the South Carolina Deferred Compensation Program: the 401(k) and 457(b) plans . Both options allow participants to contribute either pre-tax income, reducing current taxable income and providing the potential for tax-deferred growth, or after-tax income to a Roth account and capitalize on tax-free growth.

The 457(b) plan is specifically designed for government and public employees, with no early withdrawal penalty if funds are accessed before the age of 59 ½ upon separation from service. Meanwhile, the 401(k) plan offers a similar tax-advantaged growth structure but follows more traditional retirement account rules, including penalties for early withdrawals before age 59 ½.

Contributions to these plans can be made through automatic payroll deductions, and employees can choose how much they want to contribute within the annual IRS limits. In some cases, employers may offer matching contributions, though this is not guaranteed.

Employees can invest their contributions in a range of investment options , including mutual funds and target-date retirement funds, which allow for diversified growth over time.

Deferred Compensation Contribution Limits

In 2024, employees participating in the South Carolina Deferred Compensation Program can contribute up to $23,000 to a 457(b) or 401(k) plan. If an employee is 50 or older, they can make additional catch-up contributions of $7,500 to either plan, bringing the total possible contribution to $30,500 for those individuals.

However, 457(b) participants within three years of retirement eligibility may qualify for a special provision for catch-up contributions . This allows them to contribute up to twice the standard limit, potentially reaching $46,000. These limits apply to both pre-tax and Roth contributions if offered. Employees can adjust their contribution amounts throughout the year, giving them flexibility to increase or decrease their savings based on their financial circumstances.

How Much Are the Fees?

The South Carolina Deferred Compensation Program, administered by Empower, has several fees associated with participation.

• Annual recordkeeping fee: The annual recordkeeping fee is 0.065% of your account balance, deducted quarterly.
• Administrative fee: There is a $1 administrative fee, which is deducted annually in June.
• Investment management fees: The investment management fees vary depending on the specific investment options chosen by participants.

There may be other fees, as well. For those who opt for a self-directed brokerage account, there is a quarterly fee of $12.50, along with potential transaction fees and commissions based on trading activity. Importantly, the program does not charge any distribution fees when withdrawing funds.

Is There a Vesting Period?

While there is an eight-year vesting period that applies to the state's public pension plan, there is no vesting schedule associated with the South Carolina Deferred Compensation Program. This means that any money an employee contributes to their 401(k) or 457(b) account, along with any investment earnings, belongs to them immediately.

Employees then have full control over their contributions and can access the funds according to plan rules, typically after separation from service or retirement.

However, if an employer offers matching contributions , the vesting schedule for those contributions may vary, depending on the specific terms set by the employer. Some employers may require a certain number of years of service before their matching contributions become fully vested. Employees should check with their employer for details on any matching contributions and associated vesting requirements.

Making Withdrawals

Like workplace retirement plans at private companies, the deferred compensation that South Carolina offers allows participants to make withdrawals from their 401(k) or 457(b) plans under certain conditions, typically in retirement, separation from service or after reaching age 59 ½ for the 401(k) plan.

The rules are different for 401(k) withdrawals versus 457 (b) withdrawals. As mentioned earlier, withdrawals from the 401(k) plan before age 59 ½ may be subject to a 10% early withdrawal penalty, in addition to regular income taxes . However, the 457(b) plan offers more flexibility, as participants can withdraw funds after separation from service at any age without incurring an early withdrawal penalty.

Participants in both plans can also take required minimum distributions (RMDs) beginning at age 73 (75 for people born in 1960 or later), as required by IRS rules. These RMDs ensure that participants begin withdrawing from their accounts once they reach a certain age to avoid penalties.

In cases of financial hardship, both 401(k) and 457(b) plans may allow hardship withdrawals, but these are subject to strict IRS guidelines and must meet specific criteria, such as covering medical expenses or preventing eviction.

Finally, the program does not charge any distribution fees for withdrawals, which can be taken as lump sums, periodic payments or rolled over into another retirement plan, depending on the participant’s needs.

Bottom Line

The South Carolina Deferred Compensation Program offers a valuable opportunity for public employees to supplement their retirement savings with flexible, tax-advantaged plans. Whether through a 401(k) or 457(b) plan, participants can take advantage of personalized contributions, a variety of investment options and no vesting period for their contributions. With clear rules around withdrawals, contribution limits and fees, the program provides a straightforward path to building long-term financial security.

Retirement Planning Tips

• Maximizing contributions to tax-advantaged retirement accounts, such as 401(k)s or IRAs, can reduce taxable income now and allow savings to grow tax-deferred or tax-free, depending on the type of account. Roth accounts provide a different tax benefit, with withdrawals being tax-free in retirement .
• Whether you have a defined benefit pension plan, a 401(k) or IRA, you may have questions about how to afford retirement. A financial advisor can help you through the retirement planning process. 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 .

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