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Deferred Comp Question
Old 06-15-2017, 11:26 AM   #1
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Deferred Comp Question

DW and I are retiring this year and both have deferred comp plans.

She will have a lump sum of $178K distributed this year and I will have $65K next year with 25K distributed annually for the following 5 years.

These are pre tax and therefore be taxed as income,

55 YO and 54 YO.

Can we save the tax hit in anyway? We are at 33% tax rate this year.

Can not change distribution schedule as it is a 1 year wait period and have to be employed.
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Old 06-15-2017, 12:41 PM   #2
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Capjak,
Could she possibly restructure the deferred compensation? These are often annuity products. Maybe from a lump sum to a 5 year payout?
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Old 06-15-2017, 12:44 PM   #3
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Capjak,
Could she possibly restructure the deferred compensation? These are often annuity products. Maybe from a lump sum to a 5 year payout?
I Wish, unfortunately I think we messed up on this one.

Nope too late for that as you have to do it 1 year in advance of distribution and since she has 2 weeks left she will not be able to wait the 1 year (i.e. she could not retire for another year).

Thanks
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Old 06-15-2017, 02:01 PM   #4
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The deferred comp at the megacorp in my (checkered) past was/is unchangeable once the yearly forms were processed way back in the day. Nothing can be done about my increased taxes from deferred comp payouts other than avoiding other income like cap gains from selling appreciated assets. This is a serious first world problem. Or, as my Millinneal kids would say, "The struggle is real".
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Old 06-15-2017, 02:03 PM   #5
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I'm assuming this is a non-qualified plan?

Many plans offer the option to redefer. I believe by law the redeferal has to be 2 calendar years before the comp was to mature (e.g. This December I can redefer money scheduled for payout in 2019.). You also have to redefer for a minimum of 5 years.

If both payouts start next year, I think you're sunk but I would inquire with your HR dept.

Good luck...and remember, it's a high class problem!
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Old 06-15-2017, 02:06 PM   #6
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Roll some of the lump into a 401K.
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Old 06-15-2017, 02:06 PM   #7
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The deferred comp at the megacorp in my (checkered) past was/is unchangeable once the yearly forms were processed way back in the day. Nothing can be done about my increased taxes from deferred comp payouts other than avoiding other income like cap gains from selling appreciated assets. This is a serious first world problem. Or, as my Millinneal kids would say, "The struggle is real".


I searched in vain for tax relief when I took my distributions several years back. Do your best to smile when you write the check
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Old 06-15-2017, 02:39 PM   #8
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My experience is so out of date it's probably worthless. I did DC big time in eighties (in local government). They were terrible plans but worth the tax savings. In late nineties I found out you could convert these to your IRA, which I did as soon as I could. No tax consequence. Well, there sure will be when I turn 70-1/2. In any case, I'd sure investigate if these payments can't be transferred to an IRA or 401k.
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Old 06-15-2017, 02:47 PM   #9
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Move to Florida , you beat Illinois out of the state taxes.
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Old 06-15-2017, 07:10 PM   #10
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Originally Posted by capjak View Post
DW and I are retiring this year and both have deferred comp plans.

She will have a lump sum of $178K distributed this year and I will have $65K next year with 25K distributed annually for the following 5 years.

These are pre tax and therefore be taxed as income,

55 YO and 54 YO.

Can we save the tax hit in anyway? We are at 33% tax rate this year.

Can not change distribution schedule as it is a 1 year wait period and have to be employed.
Traditional IRAs? If you are still working for the employer, can you have any 401k deductions? HSA deductions?

Any interest in doing a part-time gig that is self-employed for a few years? (consulting?) You could legitimately have some losses in the first year to start-things up, which could be offset (I believe) against your income.
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Old 06-15-2017, 07:42 PM   #11
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Move to Florida , you beat Illinois out of the state taxes.


Nope, state where you earned the income gets you for SIT unless payout is over 10 years or more.


I'm surprised you can't change election if the original election was for lump sum in year after termination. Technically she hasn't terminated and conceivably keep working for years. Once she actually terminates, then no change. Or was the election for a certain date? Then no change. Worth looking into again. You might be forced to wait for the payout x years by plan rules. Our plan requires five year delay if you change elections.
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Old 06-15-2017, 07:44 PM   #12
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I don't think you can do anything to avoid the tax hit. I couldn't, but depends on how the plans are structured, previous elections, and whether the plans allow for rollovers. Neither of my two employers had any options to defer the tax hit once employment was no longer.
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Old 06-15-2017, 08:17 PM   #13
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Nope, state where you earned the income gets you for SIT unless payout is over 10 years or more.


I'm surprised you can't change election if the original election was for lump sum in year after termination. Technically she hasn't terminated and conceivably keep working for years. Once she actually terminates, then no change. Or was the election for a certain date? Then no change. Worth looking into again. You might be forced to wait for the payout x years by plan rules. Our plan requires five year delay if you change elections.
That federal law can get in the way of things....

The company has no choice...
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Old 06-16-2017, 05:29 AM   #14
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Thanks for the feedback.

The plan allows to change/defer distributions, however once you elect to change it has to be 1 year prior to the change. So if today I elected to do split it to annual distribution at retirement for 5 years, the waiting period for the change to go into effect would be June 2018 and if you retire between now and June 2018 than the previous distribution (which for her is a lump sum at retirement) election is in effect.

Will look into seeing if it can be directly put into IRA to see if save taxes. Fidelity has oversight to the plan and says basically we have no options.

And yes it is a nice problem to have just wish we would have thought about it over a year ago, just a reminder to others I guess.
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Old 06-16-2017, 09:36 PM   #15
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Perhaps double up on some tax deductions such as charity. Delay any other compensation as much as possible. Just use time-honored tax management methods as best you can. Then as someone said "Smile" as you write the tax checks. A good problem to have and the tax agencies do need the money. YMMV
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Old 06-17-2017, 06:38 AM   #16
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Perhaps double up on some tax deductions such as charity. Delay any other compensation as much as possible. Just use time-honored tax management methods as best you can. Then as someone said "Smile" as you write the tax checks. A good problem to have and the tax agencies do need the money. YMMV
thanks good suggestion on increasing charity donation. I just think the charity direct is better able to distribute $$ than the government.
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Old 06-17-2017, 07:42 AM   #17
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Thanks for the feedback.

The plan allows to change/defer distributions, however once you elect to change it has to be 1 year prior to the change. So if today I elected to do split it to annual distribution at retirement for 5 years, the waiting period for the change to go into effect would be June 2018 and if you retire between now and June 2018 than the previous distribution (which for her is a lump sum at retirement) election is in effect.

Will look into seeing if it can be directly put into IRA to see if save taxes. Fidelity has oversight to the plan and says basically we have no options.

And yes it is a nice problem to have just wish we would have thought about it over a year ago, just a reminder to others I guess.
Your plan is very similar to mine. I have looked hard, but I don't see any way to minimize taxes on the income side (other than minimizing other income such as dividends,etc). You can't defer by rolling into IRA. Deferred compensation does NOT qualify as earned income (and therefore does not qualify by itself for an IRA contribution) as far as the IRS is concerned. I wish it did, and I think it can be argued that it SHOULD be, but Uncle Sam prefers to disagree.

What you CAN do is maximize deductions. Charitable, investment losses, real estate losses (take a page from the book of POTUS....), etc
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Old 06-17-2017, 08:13 AM   #18
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Move to Florida , you beat Illinois out of the state taxes.
That's what I did. Moved from Ontario to Alberta. Saved about 7.5% on the cash outs. Ended up being a lot of money over the cash out period. Ongoing as well.
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Old 06-18-2017, 07:25 AM   #19
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Move to Florida , you beat Illinois out of the state taxes.
I would move in a minute, but I have but one vote and the wife has 2 votes so not happening as long as grown kids are in the area.....
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Old 06-18-2017, 07:36 AM   #20
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You can't defer by rolling into IRA. Deferred compensation does NOT qualify as earned income (and therefore does not qualify by itself for an IRA contribution) as far as the IRS is concerned. I wish it did, and I think it can be argued that it SHOULD be, but Uncle Sam prefers to disagree.
Interesting. I worked for a state agency and deferred salary through a 457 plan. My plan explicitly states that the deferred compensation can be rolled into an IRA after separating from service. I haven't done so yet, but will in the next month or so. Hopefully it will be straightforward.

It doesn't seem fair that private deferred comp plans ban transfers to an IRA when my state sponsored plan allows it. Frankly without this privilege I would have saved extra after-tax money because I've never been in a high Federal tax bracket. My main motivation was to avoid paying state income tax (IRA income is not taxed by my state).
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