Deferred compensation is a retirement savings plan that allows employees to set aside a portion of their income to be paid out at a future date, which is typically during retirement. The Nevada deferred compensation program is designed to help public employees save for retirement by deferring a portion of their salary into investment accounts that grow over time. These plans offer tax advantages, as contributions are made pre-tax, allowing employees to reduce their taxable income while saving for the future.
If you need help planning your retirement, a financial advisor could recommend savings, investment and tax strategies for your nest egg.
How Deferred Compensation Works in Nevada
The Nevada deferred compensation program is a voluntary retirement savings plan offered to employees of the State of Nevada, as well as other local government employers. The program is voluntary, meaning employees can choose whether or not to participate. Participation in the program allows employees to supplement their pension or other retirement savings with tax-deferred contributions.
Administered by the Nevada Public Employees’ Deferred Compensation Program (NDC), the plan allows employees to defer a portion of their salary into a retirement account, which can be invested in a variety of financial instruments such as mutual funds, bonds and stocks. The deferred compensation is not taxed when contributed, but withdrawals made during retirement are subject to ordinary income tax. This tax advantage makes deferred compensation a popular tool for reducing taxable income during an employee's working years while preparing for a financially secure retirement.
Employees can decide how much of their salary to defer, up to the annual IRS contribution limits. The funds in the deferred compensation account grow tax-deferred until they are withdrawn, often after retirement. You can also choose from different investment options based on your risk tolerance and retirement goals.
Nevada Deferred Compensation Options
The Nevada deferred compensation program offers a variety of investment options to help you grow your retirement savings. Here are five to consider:
- Target date funds are designed to simplify the investment process by automatically adjusting the asset allocation based on the participant's expected retirement date. As the target retirement date approaches, these funds gradually shift from more aggressive investments, such as stocks, to more conservative ones like bonds. This option is ideal for employees who prefer a hands-off approach to managing their investments.
- Stable value funds provide a conservative investment option that focuses on capital preservation. These funds offer steady returns and lower risk when compared with stock-based investments. This makes them a good choice for employees nearing retirement or those with a low risk tolerance.
- Bond funds invest in a mix of government, corporate and municipal bonds. These funds are less volatile than stock funds and provide regular income through interest payments. Bond funds are generally more stable than equity investments and can be a good choice for employees who want to balance risk and return in their portfolio.
- Stock funds invest primarily in equities, which have the potential for higher returns over the long term. However, they come with more risk. Employees who are early in their careers or have a longer investment horizon may choose stock funds to maximize growth potential.
- Balanced funds combine both stocks and bonds to provide a diversified portfolio. These funds offer a moderate risk-return profile. This makes them a good option for employees who want a mix of growth and stability in their investments.
Contribution Limits
Contribution limits for the Nevada deferred compensation program are set by the IRS and can change annually. For 2024, the standard contribution limit for 457(b) deferred compensation plans is $23,000. Employees aged 50 and older can take advantage of the catch-up provision, which allows them to contribute an additional $7,500 per year, bringing the total contribution limit to $30,500.
These limits apply across all deferred compensation plans, so if an employee is participating in multiple plans, the combined contributions cannot exceed the IRS limits. Employees should also consider how their contributions impact their overall retirement strategy, as maximizing contributions early on can lead to greater tax-deferred growth over time.
Compensation Fees
Participating in Nevada's deferred compensation program comes with several advantages, but participants should be aware of the associated fees that must be covered as part of the program’s overall structure.
Deferred compensation program fees generally cover the administrative costs of managing the plan and the investment management fees associated with the specific funds chosen by the participant. Here's a breakdown of two types of fees:
- Administrative fees: Administrative fees cover the costs of running the deferred compensation program, including record-keeping, customer service and other administrative services. In Nevada, these fees are typically low but can vary, depending on the size of the account and the services provided.
- Investment management fees: Each type of investment, such as mutual funds or bond funds, comes with its own management fees, often expressed as an expense ratio. These fees compensate the fund managers for selecting and overseeing the assets within the fund. It is important to review the expense ratios of your chosen investments, as high fees can eat into your returns over time.
In Nevada, a quarterly fee of $10.25 is applied to all participant accounts with a total balance of $1,000 or more, regardless of the investment type. This charge will appear as a line item on the participant's quarterly statement.
How to Make Withdrawals
Withdrawing from your Nevada deferred compensation account is generally allowed during retirement, but there are other qualifying events when withdrawals may be allowed:
- Retirement withdrawals: Once you retire or retire due to a permanent disability, you can begin withdrawing funds from your deferred compensation account. These withdrawals are subject to ordinary income tax unless rolled over into another eligible plan or IRA. The withdrawals are not subject to early withdrawal penalties, unlike some other retirement accounts.
- Hardship withdrawals: If you face an unexpected financial hardship, you may qualify for an emergency withdrawal. You will need to provide proof of financial hardship and meet strict federal guidelines to have the request approved. These emergency withdrawals are subject to income tax.
- Severance of employment: If you leave your job or sever your employment, you may be eligible to take distributions from your account. As with other types of withdrawals, the funds are subject to ordinary income tax unless rolled over to another eligible plan.
- Required minimum distributions (RMDs): Like other retirement accounts, you are required to begin taking distributions from your deferred compensation plan by age 73. If you have not taken distributions by that age, RMDs must begin to avoid tax penalties. However, you can leave the account balance in the plan until age 73, even if a qualifying event has occurred.
- In-service transfer: You can request a transfer of pre-tax funds from your deferred compensation account to Nevada PERS to purchase service credit. This transfer is non-taxable and can be done while you are still employed.
- Cash out: If your account balance is less than $5,000 and you haven't contributed in the last 24 months, you may be eligible for a cash-out provision. This option allows you to withdraw the entire balance, though income tax applies.
Bottom Line
The Nevada deferred compensation program offers public employees a way to save for retirement while benefiting from tax-deferred growth. With various investment options, low fees and flexible contribution limits, it can play an important part in your retirement strategy.
Tips for Retirement Planning
- A financial advisor can help you create a retirement plan based on your needs, goals and risk profile. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your retirement savings could grow, SmartAsset's free retirement calculator can help you get an estimate.
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