- The primary attraction of deferred compensation for employees is that it bypasses income tax assessments. If you choose to take deferred compensation in the form of incentive stock options or a pension, those funds divert directly into the investment pool without incurring income tax. When you capitalize on those assets---either purchasing your stock option or receiving your pension---you're responsible for taxes, but only at capital-gains rates. As of 2011, the maximum capital gains rate is 15 percent. If you earn more than $34,000, or $68,000 if filing jointly, and take a cash bonus, it will be taxed between 25 and 35 percent, depending on where you fall in the tax brackets. That can represent a large amount of money in many situations.
- Deferred compensation isn't a preferred debt like retirement plans such as 401ks and 403bs, so if you choose deferred compensation and your employer files for bankruptcy, those assets aren't protected from creditors. If you're in doubt about your employer's long-term financial solvency, you may choose to receive your bonus as a cash payment. Although you'll pay more upfront in taxes, you'll receive the peace of mind that your hard-earned compensation isn't going to be seized by bankruptcy judge to pay for corporate mismanagement.
- Stock options---contracts that allow you to purchase stock at a preferred price if you still work for your employer at an agreed-upon date---suffer from the general volatility of the stock market. Theoretically, the preferred price at which you purchase stock is less than the open-market price for the stock, providing you with an increase in your investment's value. If your company's stock value declines during the period in which you wait for the option to mature, the value steadily decreases. For example, if you take a stock option that allows you to purchase 100 shares at $10 a share at a time that the stock trades at $20 a share, that option is worth $1,000. If market values fall before the option matures to $12 per share, that option is only worth $200.
- Consider your long-term career goals before accepting deferred compensation. Many companies use stock options as a means to help retain employees, structuring agreements so they're only valid if the employee remains at the company until the vesting date. If you plan on staying with your firm for the long haul, this shouldn't be a concern. If you're ready to advance and don't see opportunities in your company, the potential value of deferred compensation may be enough to keep you from finding a new employer.
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