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City of Springfield, Illinois ~ Misty Buscher, Mayor

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Memo to Employees - Deferred Comp


One of the most important benefits of your Deferred Compensation plan is that your contributions and earnings are tax deferred. Taking advantage of your City’s Deferred Compensation plan can make a significant difference in your bottom line, both now and when you retire.

Here’s why:

Lower taxes now - and later
First, you save money on current taxes. Your deferred compensation contributions are deducted from your gross pay before current income taxes are calculated. Therefore, your taxable income is reduced. However, your Social Security, Illinois Municipal Retirement Fund (IMRF), Police or Fire Pension contributions all continue to be based upon your gross pay.

Secondly, your invested deferred compensation contributions accumulate on a tax deferred basis. This means that, in addition to deferring current income taxes on your contributions, all investment income and capital gains for your account grow tax-deferred as well.

Of course, you will have to pay taxes on retirement withdrawals from your Deferred Compensation plan. But you will probably be in a lower tax bracket, thus lowering your tax amounts. Also, all of your money has been working for you, not just what was left after taxes each year. That can make a very BIG difference over the long term.

The power of compounding
As your investment compounds over time, the benefits of a tax deferred plan become even clearer. Compounding means you earn both on your payroll contributions and on your prior investment earnings. In essence, you earn on both your principal and on your investment earnings.

The Table illustrates the advantages of tax deferred savings and compounding of interest earnings offered by the City’s Deferred Compensation plan.