Understanding Deferred Compensation Plans for Missouri Employees

A deferred compensation plan allows eligible employees to set aside a portion of their salary into an account that grows tax-free until retirement. Many public employees in Missouri can take advantage of these plans, often referred to as 457(b) plans, to supplement their pensions or Social Security. A financial advisor can assist in navigating Missouri’s deferred compensation plan, contributing to effective management of contribution limits, tax benefits, and investment options to achieve retirement goals.

What Is a Deferred Compensation Plan?

A deferred compensation plan is a retirement savings tool that permits employees to allocate a percentage or dollar amount of their pre-tax salary. The funds are then invested in various options, including mutual funds, stocks, or bonds. Since these contributions are tax-deferred, you do not pay taxes on the contributions or any investment gains until you withdraw the money during retirement. This feature also helps lower your taxable income throughout your working years.

These plans are commonly available to public employees, such as government staff, teachers, and law enforcement officers. If eligible, you can participate in the Missouri State Employees’ Deferred Compensation Plan (MOSERS), a 457(b) plan tailored for state employees. Local government workers might also qualify for similar deferred compensation plans.

Deferred Compensation Plan Options in Missouri

Several deferred compensation plan options are available in Missouri, each offering a variety of investment choices and including both traditional and Roth varieties. Consider these three options:

• Missouri State Employees’ Deferred Compensation Plan (MOSERS): This is the primary 457(b) plan for Missouri state employees. MOSERS features a wide range of investment options, including target-date funds, fixed-income funds, and equity funds, enabling participants to customize their investment strategy based on retirement ambitions and risk preference.
• Local Government Deferred Compensation Plans: Some local municipalities in Missouri may provide their own deferred compensation plans, usually following the same 457(b) structure. They often offer similar investment alternatives, enabling employees to save while deferring income taxes.
• Roth 457(b) Option: Many Missouri employees also have access to a Roth 457(b) option. With this option, contributions are made after tax, allowing for tax-free withdrawals in retirement. This can benefit those expecting to be in a higher tax bracket at retirement, as they will pay taxes now and avoid them later.

How to Make Withdrawals

Participants may begin withdrawing funds from a deferred compensation plan in Missouri once they reach retirement age or separate from service. Unlike 401(k)s or IRAs, 457(b) plans don’t impose early withdrawal penalties for those who leave their employer before the age of 59½, providing greater flexibility for early retirees or job changers.

Withdrawals are taxed as ordinary income, making it crucial to plan for potential tax implications. Participants can select from various withdrawal methods, including lump-sum payments, periodic distributions, or rolling funds into another retirement account like an IRA. For those with a Roth 457(b), withdrawals are tax-free, provided they meet eligibility guidelines, which include holding the account for at least five years and being over age 59½ when making withdrawals.

Compensation Fees

Fees associated with deferred compensation plans are implemented to cover the costs of managing these plans and offering related services. Understanding these fees is vital, as they can impact your account balance over time. Here are three types of fees to consider:

• Administrative Fees: These fees support the maintenance of the plan, provision of account services, and compliance with regulations. Typically a small percentage of your account balance, these are automatically deducted.
• Investment Fees: Each investment option, such as mutual funds or target-date funds, carries specific fees known as expense ratios. These fees fund the management of the fund and vary by investment type. It’s prudent to examine these fees when choosing investment options, as higher fees can diminish your savings in the long run.
• Advisory Fees: Some plans might offer the option to work with a financial advisor or utilize automated investment services. Although these services often incur additional fees, they can provide essential guidance for optimizing your retirement strategy.

Frequently Asked Questions

What Happens If I Leave My Job Before Retirement?

If you leave your job prior to retirement, you can take your deferred compensation plan with you. You may choose to leave the funds in the plan, roll them over into an IRA or another retirement account, or start making withdrawals, which will be subject to income tax.

How Much Can I Contribute to a Deferred Compensation Plan?

In 2024, the contribution limit for 457(b) plans is set at $23,000. Employees aged 50 or older can also make catch-up contributions, raising the limit by an extra $7,500.

Bottom Line

Missouri’s deferred compensation plans provide public employees with a tax-advantaged method to secure their financial future. With options like traditional and Roth 457(b) plans, these programs offer both flexibility and potential tax benefits. Being aware of fees, withdrawal regulations, and contribution limits can empower you to make the most of your retirement plan.

Retirement Planning Tips

• A financial advisor can help craft a personalized retirement plan suited to your needs. Finding an advisor is easier than you think. SmartAsset’s free tool connects you with up to three vetted financial advisors in your area for a complimentary introductory call, allowing you to choose the best fit.
• If you want an estimate of how much your retirement savings could grow over time, consider using SmartAsset’s free calculator.

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