How Deferred Compensation Works in Kentucky

The Kentucky deferred compensation (KDC) plan allows employees to defer a portion of their income for a later date or retirement. State employees, including public school teachers, can participate in 401(k), 457 and IRA plans, which offer tax benefits by delaying income taxes on contributions until withdrawal. Participants can select from a range of investment options based on their financial goals and risk tolerance. KDC plans offer a flexible way to supplement retirement income and support long-term growth.

If you need help with retirement planning, a financial advisor can suggest savings, investment, and tax strategies to grow your nest egg.

What Is Kentucky Deferred Compensation (KDC)?

The KDC plan is a supplemental retirement savings plan available to state, public school and university employees, as well as employees of participating local political subdivisions. The KDC is designed to help employees build a more financially secure retirement through voluntary savings.

Established in 1974, KDC offers a variety of savings options, including a 457(b) plan, 401(k) plan and deemed IRAs, with both pre-tax and Roth (after-tax) contribution choices. The program allows participants to contribute through payroll deductions, offering a convenient way to save for retirement while deferring income taxes on contributions and earnings until funds are withdrawn.

KDC lets participants pick from a variety of funds while offering low fees and potential tax benefits. The plan is managed by Kentucky’s Personnel Cabinet, with Nationwide Retirement Specialists available to assist. For an extra cost, you can also get professional investment management services.

What Types of Accounts Does the KDC Offer?

A government worker reviewing his deferred compensation plan.

The KDC program offers three main types of retirement savings accounts:

457(b). This plan lets employees contribute either pre-tax or Roth after-tax funds. Contributions are tax-deferred until withdrawn, helping reduce taxable income during employment. It also has no early withdrawal penalty for participants under 59 ½, unlike many other retirement accounts.
401(k). This is a popular pre-tax savings option, with Roth after-tax contributions also available. This plan allows for higher contribution limits, especially with catch-up contributions for participants over 50. Withdrawals after age 59 ½ or retirement avoid early withdrawal penalties. The 401(k) can also be paired with deemed IRAs for more flexibility.
Deemed IRAs. These are traditional or Roth IRAs offered within the KDC framework. Unlike the 457(b) and 401(k), deemed IRAs are not tied to payroll deductions (unless the employer offers it). These IRAs provide additional tax advantages depending on the account type, allowing either tax-deferred growth (traditional) or tax-free withdrawals (Roth).

Contribution Limits

As of 2024, there are specific contribution limits for the KDC plan.

For the 457(b) plan, the standard contribution limit is $23,000 per year. Participants aged 50 or older can make an additional catch-up contribution of $7,500, bringing the total to $30,500.

For the 401(k) plan, the standard contribution limit is also $23,000 per year, with an additional $7,000 catch-up contribution for participants aged 50 or older, for a total of $30,500.

For deemed IRAs, whether Roth or traditional, the contribution limit is $6,500 per year. Participants aged 50 or older can contribute an additional $1,000, raising the total to $7,500.

Who’s Eligible for the KDC?

Eligibility for the KDC program is open to public employees in the Commonwealth of Kentucky. This includes both full-time and part-time employees, giving a broad range of public workers the opportunity to save for retirement through KDC.

To enroll, employees must be actively working for a participating employer. There are no minimum income requirements to join and employees can contribute to the 457(b), 401(k) and deemed IRA plans offered by KDC. The minimum monthly contribution for all plans is $30, and contributions are deducted directly from the employee’s paycheck for 401(k) and 457(b) plans. For deemed IRAs, payroll deductions are optional and direct payments can be made.

The program is available to employees regardless of their tax bracket or financial background. Participation is voluntary, allowing employees to decide how much to contribute and which plan best fits their retirement needs.

How Much Does It Cost to Participate?

Participating in the KDC program comes with relatively low costs when compared with other retirement savings options.

Administrative fees: All participants pay a flat administrative fee of $1 per month, totaling $12 per year. This fee covers the basic operational costs of managing the KDC program. However, newly enrolled participants in the 457(b) or 401(k) plans are exempt from this fee during their first year of participation. This exemption does not apply to deemed IRAs.
Investment fees: Participants also pay investment-related fees, which vary based on the specific funds they choose. These fees are typically expressed as a percentage of assets under management, and they cover fund management and operational expenses. The total cost participants can be charged for mutual fund investments is capped at $225 annually.
Monthly fees: For accounts with a balance of $5,000 or less that have been inactive for six months, an additional $6 monthly fee is charged.

Bottom Line

A woman reviewing documents for her retirement plan.

KDC offers pre-tax and Roth contributions, low fees and a range of investment options to help employees grow their retirement savings. This program allows participants to choose different plans, depending on their financial goals and retirement needs, including 457(b)s, 401(k)s and deemed IRAs.

Tips for Retirement Planning

A financial advisor can help you create a personalized retirement plan. 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.
If you want to know how much your retirement savings could grow, SmartAsset’s free retirement calculator can help you get an estimate.