We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
HR

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is an Employee Deferral?

By G. Wiesen
Updated: May 16, 2024
Views: 16,844
References
Share

An employee deferral is an investment, often into a retirement account that pays into a mutual fund, that is based on personal income. Rather than receiving this payment at the regular time in which someone receives his or her salary, it is invested into an account before taxes are taken on it. Once in the account, this money can begin making interest and is often used as a retirement program after many years of investing. The taxes on the money deposited into the account are taken once the investment is finally paid out to an individual, which is the end of the employee deferral.

Taxes that are typically paid on income are the source of the name "employee deferral," as these are paid at a later date. Someone typically sets up this type of plan with his or her employer, who pays money into an investment account rather than to the employee. A certain percentage of the employee's salary is paid in before taxes are taken on it, though other benefits for income such as unemployment or social security do include this invested amount. Different types of investments can be used with an employee deferral, though mutual funds are quite common.

Once the investment reaches a certain level of maturity, frequently after several decades of additions and growth, then the returns and capital can be paid out on the employee deferral. This is what makes these types of plans so popular for retirement, as they build interest and grow over many years. Once this payout is received, however, then the income tax on the initial invested amount has to be paid. These taxes are the subject of the employee deferral, and with enough return on the investment, this can be offset by the revenue from the account over time.

Some companies offer to match an employee deferral for their associates, though this is typically provided to managers and officers within a corporation. There is usually a limit on the amount that a company is willing to match, though it can effectively double the return on this type of investment. Taxes may need to be paid on this matched amount, but it is commonly paid at a different rate since this investment is not actually payment made as income. This type of employee deferral matching by a company often makes certain employers more attractive than others. Like any other investment, the effectiveness of this form of retirement program depends upon the performance of the fund into which it is paid.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Discussion Comments
Share
https://www.smartcapitalmind.com/what-is-an-employee-deferral.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.