Tax savings benefits of DCP
Now that the 2022 tax season has ended, you might be considering opportunities to reduce your taxes for next year. One of the easiest ways to do this is with the Deferred Compensation Program, or DCP. These contributions are deducted before tax, which keeps more of your dollars working for you. Your contributions are only taxed when you withdraw them, and you only pay federal income tax. If you decide to withdraw your savings before you reach retirement age, there are no additional tax penalties.
DCP can lower your taxes in two ways:
1. Now: Putting part of your paycheck into a DCP account lowers your overall taxable income. As a result, this could put you in a lower federal income tax bracket.
2. Later: If you are in a lower tax bracket once you retire, you will be taxed at a lower rate on the funds that you withdraw from your DCP account.
Federal Tax Saver’s Credit
You might be able to qualify for a Retirement Savings Contributions Credit. With this credit, you can write off a portion of your annual contributions. Visit the IRS website to see the income limits as well as eligibility information for this opportunity.
DCP has no tax penalty for early withdrawals.
Do I pay taxes on DCP withdrawals?
Yes. Because your DCP contributions are pretax, you will pay federal income taxes on the payments when you withdraw them. If you choose a lump sum to be paid directly to you, or receive payments over a period of less than 10 years, 20% of your withdrawal will be withheld for federal income taxes. If you choose an installment period of 10 years or more, your payments are considered ordinary income in the year they are issued.
For specific tax information, consult your tax advisor.
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