Deferred employee compensation plans, formally known as Section 457 plans, help employees who work for sponsoring governmental agencies and nonprofit organizations save money for retirement. Your employer will withhold from your paycheck sums you specify and will then repay you the money upon retirement. Because the IRS considers 457 plans as either non-qualified or qualified for tax purposes, you must consider the tax implications of deferral, but you will usually benefit by deferring the maximum annual amount you can afford.

Benefits

If you work for a local or state government agency that offers a 457(b) plan, you can defer up to $16,500 of your annual earnings if aged 50 years or younger and $22,000 annually if over 50, as of the date of publication. Because these contributions are always qualified, you will not pay any tax until you withdraw money from your plan. These retirement plans also feature low or no commissions for fund managers. Reduced fees and deferred taxation allow your contributions to compound tax-free, increasing the size of your portfolio by the time you retire. If you cannot spare sufficient income to reach the maximum annual limits of the plan, you should defer as much income as possible.
Considerations

If your nonprofit employer offers a non-qualified 457(f) deferred compensation plan, you may want to make minimum contributions to your plan, because the IRS usually considers income deferred under these plans as taxable. Because you will receive less income and still owe income tax on earnings you have not yet received, contributing a large percentage of your income to the plan could create a financial hardship. You might want to defer more of your income if you max out your Individual Retirement Account because money earned on investments in a 457(f) plan compound tax-free.
Flexibility

Qualified deferred compensation plans allow you to rollover your retirement funds into an IRA without a tax penalty, allowing you more flexibility in investment choices. Non-qualified plans do not permit rollovers, meaning you will pay tax on all money earned on deferred earnings in a lump sum when you withdraw your funds early from your 457(f) plan.
Risk

Deferred employee compensation plans offer security compared to stocks and bonds, because the Employee Retirement Income Security Act of 1974 (ERISA) requires 457(f) sponsors to have a trust or annuity contract that will compensate you if the funds you invest in default. 457(b) plans require government agencies to back retirement plans with their own revenues, making it unlikely that both a fund and your employer will default.
Return

You should contribute as much as possible to a deferred compensation plan if you seek a fair return on your investment with less research. Employers will offer you a basket of funds to invest in, including conservative, moderate and higher risk mutual and bond funds. Your employer will handle the research of funds, so you do not have to select from the thousands of funds currently on the market.