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How Deferred Compensation Affects Social Security Benefits

how does deferred compensation work

Deferred compensation usually won't interfere with Social Security benefits.

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Deferred compensation shouldn't affect Social Security benefits. Generally, the Social Security Administration isn't worried about payments that aren't for work in the current period. Because deferred compensation typically is subject to Social Security tax withholding, choosing to defer pay shouldn't reduce the benefits that eventually will be available when a person goes to collect benefits, either.

Nonqualified Deferred Compensation Basics

Nonqualified deferred compensation plans, usually aimed at executives, allow a limited number of highly compensated employees to set aside a portion of their pay. Money goes into the deferred compensation plan on a pretax basis, so they benefit from tax deferral. These plans don't have the same contribution limitations as a qualified plan such as a 401(k). But they pose additional risks for the employee because they don't have the legal protections of qualified plans.

Social Security Tax Withholding

Money typically flows into a deferred compensation plan free of withheld taxes.

Income taxes come out when the income is eventually withdrawn. Taxation for Social Security and Medicare generally has to be paid either when the money comes out or when it has become vested and is available for the employee to use. However, because the tax gets paid, the income will be applied to the account holder's eligibility for Social Security and will be used to calculate his eventual benefit amount.

Social Security Earning Limits

Social Security limits how much money a benefit recipient can earn from working while collecting benefits. At the time of publication, recipients of Social Security benefits who are younger than their full retirement age of 66 can earn up to $15,480 without having their benefits reduced. Those receiving benefits in the year they turn 66 can earn up to $41,400 without having their benefits cut, and those who are older than their full retirement age have no caps on their earnings. These limits can change yearly; check with the IRS for current income caps.

Deferred Compensation and Benefits

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