Modeling Deferred Comp Payout

pb4uski said:

I think i would do it as you are. Convert it to an after-tax amount using the expected marginal tax rates and include that as a taxable account asset in your retirement projections.

The other approach would be to include it pre-tax and include special expenses in the years you expect to receive it for the tax bite.

Six of one... half dozen of another.

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krotoole said:

OK, for all the modeling gurus out there...curious how you would model the following...

I have a tidy sum (and a large fraction of my net worth) in a deferred compensation plan. In all likelihood, the money will pay out before I ER and while I still have other income coming in. I intend 100% of this money to be pointed toward retirement.

This makes modeling complicated in two dimensions:

1) How do I think of this money in terms of retirement "assets"? As the money will need to flow through the income tax system, and I can't just hold it off until RMDs kick in like an IRA, it doesn't seem right to score 100% of the value as a retirement asset (e.g., I can't just do a SWR % against the gross value of the money). I think it has to get marked down to the likely after-tax value because it will come out in large chunks ($150K+/yr)

2) What tax rate should I use for the mark down? I don't know how much I'll be earning in the years this money comes out, but hopefully its a good amount. So when I reduce the gross value of the deferred comp by the likely tax load, should I treat all of the deferred comp as though it comes out "on top" of my earnings for those years? That would imply marginal rates >35-45%. Or should I think of that money as the first dollars that come out and then "stack" my earned income on top of that (implying that I would pay a higher effective rate on the earned income but would "keep" more of the deferred comp in my retirement assets.)

My current approach is:

1) Mark down the value to an after-tax amount for modeling purposes

2) Treat the deferred comp as the "last dollars earned" and assume a 40% tax hit to the deferred comp as it pays out

Am curious how others would think about this.

Thanks.

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robertf57 said:

First, I am a bit confused about your plan. Is this a 457 plan? Do you really need or want to take funds from it while you are still working? I personally consider my 457 plan like any other pre-tax retirement account; only with better withdrawal options. No any more complicated than that.

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krotoole said:

OK, for all the modeling gurus out there...curious how you would model the following...

I have a tidy sum (and a large fraction of my net worth) in a deferred compensation plan. In all likelihood, the money will pay out before I ER and while I still have other income coming in. I intend 100% of this money to be pointed toward retirement.

This makes modeling complicated in two dimensions:

1) How do I think of this money in terms of retirement "assets"? As the money will need to flow through the income tax system, and I can't just hold it off until RMDs kick in like an IRA, it doesn't seem right to score 100% of the value as a retirement asset (e.g., I can't just do a SWR % against the gross value of the money). I think it has to get marked down to the likely after-tax value because it will come out in large chunks ($150K+/yr)

2) What tax rate should I use for the mark down? I don't know how much I'll be earning in the years this money comes out, but hopefully its a good amount. So when I reduce the gross value of the deferred comp by the likely tax load, should I treat all of the deferred comp as though it comes out "on top" of my earnings for those years? That would imply marginal rates >35-45%. Or should I think of that money as the first dollars that come out and then "stack" my earned income on top of that (implying that I would pay a higher effective rate on the earned income but would "keep" more of the deferred comp in my retirement assets.)

My current approach is:

1) Mark down the value to an after-tax amount for modeling purposes

2) Treat the deferred comp as the "last dollars earned" and assume a 40% tax hit to the deferred comp as it pays out

Am curious how others would think about this.

Thanks.

Click to expand...

Big_Hitter said:

I'm sure this is a NQDC plan (IRC 409A) - the OP has to elect the time (age 60/65 etc.) and form of payment (lump sum, 5 year term, etc.) before compensation is deferred; so generally, there is no decision to make regarding time or form of payment at this point


https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A

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robertf57 said:

If this is a non-qualified plan, as Big-Hitter probably correctly laid out, then you should have a good handle on how it will be paid and you should model it as a pre-tax asset taken as periodic payments per your previous election. That way you can model the tax impact on other earnings.

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Bir48die said:

You are in a similar situation to me. Maybe I missed it but is this a single payout? Mine is over a ten year period.

From a modeling standpoint I treated this like tax deferred assets since I will be taxed on the income. My financial advisor didn't recognize as a total portfolio asset but used the income stream for total withdrawals.

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