What is the Purpose of a Deferred Income Plan?
The primary purpose of a deferred income plan is to allow you to postpone receipt of a portion of your current income until after you retire. The amount of current earnings deferred will not be considered as income for federal income tax purposes until you actually receive the income, usually after retirement when you may be in a lower tax bracket. At that time, it will be taxed as ordinary income. By deferring payment of income taxes until you receive the value of your account as a retirement benefit, you can invest more of your current earnings for retirement. By so doing, you may reduce the total amount of income taxes paid during your lifetime and thereby accumulate a larger sum for retirement than would have been possible had you invested after-tax dollars.
