Deferred compensation in New York City offers public employees an opportunity to plan for their financial future. The New York City Deferred Compensation Plan is a voluntary program that allows city employees to set aside a portion of their salary for retirement, thereby reducing their taxable income in the present. Participants can choose between a 457(b) plan and a 401(k) plan, each with its own set of benefits and investment options.
If you want to keep your retirement savings on track, a financial advisor can help you create a plan to set and reach different goals.
What Is NYC’s Deferred Compensation Plan?
The New York City Deferred Compensation Plan (DCP) helps city employees build a secure financial future by allowing them to defer a portion of their salary into retirement savings plans. Eligible participants can choose between a 457(b) plan and a 401(k) plan, or opt to contribute to both. Employees can invest in a variety of options, including mutual funds and target date funds.
Who’s Eligible for the DCP?
This program is specifically designed for individuals employed by the City of New York, including those working in various city agencies, public schools and other municipal entities.
Eligibility for the New York City Deferred Compensation Plan extends to all full-time and part-time employees of the city. This includes civil service workers, teachers, police officers, firefighters and other municipal employees. Additionally, certain employees of participating public benefit corporations and authorities may also qualify.
Contribution Limits
For 2024, participants in the DCP can contribute up to 75% of their reportable gross income – up $23,000 – to a traditional 457 or 401(k) plan. This limit applies to pre-tax contributions and is set by the Internal Revenue Service (IRS). Individuals who are age 50 or older have the opportunity to make additional catch-up contributions, raising their contribution limit by an extra $7,500 for a total of $30,500.
Special 457 Catch-Up Contributions
The Deferral Acceleration for Retirement (DAR) is a catch-up provision within the NYC DCP 457 plan that offers a way for those behind in their retirement savings to boost their contributions in the final years before retirement. If a participant didn’t contribute the maximum amount in earlier years, they can contribute more than the standard annual limit through DAR.
Participants can only take advantage of this provision during the three consecutive years prior to their designated Normal Retirement Age (NRA), which can range from when they first qualify for full pension benefits up to age 72.
For 2024, this special catch-up limit enables eligible participants to contribute up to twice the standard annual limit. This means participants may be able to defer up to $46,000 if they qualify. It’s important to note that participants can either use the special 457 catch-up or the standard age-based catch-up, but not both in the same year.
DCP Account Options: 457 vs. 401(k)
The Deferred Compensation Plan (DCP) in New York City offers two primary account options: the 457 and 401(k). While both accounts provide tax advantages, there are key differences that can affect how participants manage their retirement savings:
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Contribution limits: Both plans have similar contribution limits, but participants can contribute to both plans simultaneously, potentially doubling their savings.
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Withdrawals: The 457 plan allows penalty-free withdrawals upon separation from service, no matter the participant’s age. In contrast, the 401(k) imposes a 10% penalty on withdrawals before age 59½, unless certain conditions are met.
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Catch-up contributions: Both plans offer catch-up contributions for participants over age 50, but the 457 plan includes an additional special catch-up option in the three years prior to retirement.
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Loan provisions: Both plans allow for loans, but the terms and conditions may vary slightly based on the participant’s status and the plan’s specific rules.
Fees and Costs
The DCP is a self-funded program, meaning its operations are covered by participant fees rather than external funding sources. As part of this arrangement, DCP participants are responsible for paying an administrative fee of $20 per quarter. This fee remains the same whether an individual has a 457 account, a 401(k) account, or both, totaling $80 annually.
In addition to the flat administrative fee, participants also pay an asset-based fee of 0.04% on their investment funds. This annualized fee is deducted from the value of the assets in the participant’s account and helps cover the costs of managing the plan’s investment options.
NYC Deferred Compensation Loans
Participants in New York City’s DCP may be eligible to borrow from their accounts under certain conditions. The DCP offers loans from both the 457 and 401(k) plans (but not Roth options), allowing participants to access funds before retirement. However, there are specific rules that govern these loans.
Participants can borrow a portion of their account balance, typically limited to 50% of their vested account value, with a maximum loan amount of $50,000. Loans must be repaid through payroll deductions within a set period.
It’s worth noting that loan repayments include both principal and interest, and failing to repay the loan on time can result in penalties or the loan being considered a taxable distribution. Participants should also be aware that taking out a loan reduces the amount invested in the plan, which could impact long-term growth.
Bottom Line
The New York City Deferred Compensation Plan (DCP) allows municipal employees to boost their retirement savings through tax-deferred contributions. By letting participants choose between a 457 plan, a 401(k) plan or both, the DCP provides flexibility in how individuals manage their long-term investments. With options like catch-up contributions and loans, participants can tailor their retirement saving strategy to meet their unique needs. Before investing in the NYC DCP, understand the fees, contribution limits and unique features so you can make informed decisions about your future financial security.
Tips for Retirement Planning
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A financial advisor can help you determine which plan makes sense for your retirement. 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.
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If you want to know how much your retirement savings could grow over time, use SmartAsset’s free retirement calculator to get an estimate.
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