Salary deferral refers to an arrangement where an employee voluntarily chooses to delay receiving a portion of their earned salary until a later date, typically retirement. Rather than receiving immediate payment, the deferred income is diverted into a retirement account or another type of savings plan, such as a 401(k) or 403(b). This practice allows workers to set aside funds for the long term, reducing their current taxable income.
One of the primary reasons employees opt for salary deferral is the immediate tax benefit. When salary is deferred into tax-deferred accounts, taxes on that income are also postponed until withdrawn, usually during retirement. By lowering current taxable income, employees can potentially move into a lower tax bracket and reduce their current-year tax liability.
In addition, deferred salary often earns interest or investment returns, enhancing the individual's retirement savings significantly. Employers sometimes support salary deferral options by matching a portion of the employee's contributions, providing further incentive for employees to utilize these plans.
It's essential, however, to consider the potential drawbacks of salary deferrals. Deferred income typically comes with restrictions and penalties for early withdrawal. Employees should fully understand the details and limitations before pursuing a salary deferral strategy.
