Which retirement plan allows an employee to contribute a portion of income over time to be paid as a lump sum at retirement when the employee's income tax rate will be lower?

Which retirement plan allows an employee to contribute a portion of income over time to be paid as a lump sum at retirement when the employee's income tax rate will be lower?

• A. Culture
• B. Defined benefit plan
• C. Days to fill
• D. Deferred compensation plan

Answer: (D)

Deferred compensation plans allow an employee to defer a portion of current earnings to be received later, typically at retirement, with the idea that those funds will be taxed when they are paid out—often in a lower tax bracket. This setup directly targets paying taxes on the income at retirement rather than now, and the payout can be in a lump sum or installments, depending on the plan. A defined benefit plan, by contrast, provides a predetermined retirement benefit funded by the employer and does not center on deferring current pay for a lump sum at retirement. The other options are not relevant to the concept of postponing compensation for future payment.

Deferred compensation plans allow an employee to defer a portion of current earnings to be received later, typically at retirement, with the idea that those funds will be taxed when they are paid out—often in a lower tax bracket. This setup directly targets paying taxes on the income at retirement rather than now, and the payout can be in a lump sum or installments, depending on the plan. A defined benefit plan, by contrast, provides a predetermined retirement benefit funded by the employer and does not center on deferring current pay for a lump sum at retirement. The other options are not relevant to the concept of postponing compensation for future payment.