Roth IRAs and deferred-compensation plans allow you to save on taxes with your retirement money, but at different points in your career. A Roth individual retirement account has income limits, so if yours is too high, you may not be able to contribute. With deferred compensation, you're unlikely to have a plan unless you have a high income.
Signing up for a deferred-compensation plan postpones part of your pay, possibly for years. If you've earned your way into an upper tax bracket, deferring pay until retirement cuts your tax bill because you have less income to report. The money grows tax-free, but you pay income taxes when you withdraw it. At that point, you may be in a lower bracket.
You don't get any tax break for contributing to a Roth IRA, but your account grows tax-free. You can withdraw your contributions tax-free at any time. After you turn age 59 1/2, you can withdraw earnings tax-free, too. If you have to choose between investing in a Roth and deferring compensation, it may come down to how high your taxes are now and what you expect them to be in the future.
Roths and Creditors
Once you contribute to a Roth, the money is yours. You never pay taxes on it, if you follow the Internal Revenue Service rules. Unlike with a traditional IRA, you never have to make a withdrawal. That could allow you to pass the account on to your heirs untouched. Federal law protects your 401(k) from creditors, but not your IRAs. Some states provide a shield for IRA funds. If you live in an unshielded state, creditors can sue and claim your account.
Risks of Compensation
You don't pay taxes on the money in a deferred-compensation plan because it isn't really yours yet. Because it still belongs to your employer, it's vulnerable to creditors, just like the company's other assets. If your company goes into bankruptcy or gets hit with a major lawsuit, you could wind up seeing your retirement fund vanish.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.