Any experience with deferred compensation plans?

[nobodyspecial]

With my plan, I assigned beneficiaries (in the unlikely case). Also, I could've set a specific distribution date, but I chose to receive disbursements after I left the company. Since you're effectively loaning monies to your company, I don't think how you separate matters.

[Scuba]

I participated in my company’s 403b plan only to the extent of the company match, then maxed out the deferred comp plan, and invested the rest in a taxable brokerage account. Worked out very well for me. There is a lot of flexibility in how the money could be distributed. I chose to use mine as a bridge between early retirement and reaching full retirement age for SS. Sort of like creating my own pension.

[ImThinkin2019]

My wife's deferred pay was put into a Fidelity account so I assume if her employer got in trouble the money would not be accessible to them. Already paid out and off their books.

[Magus]

The two big risk with NQDC plan is company goes bankrupt or company gets sold and new owner forces a lump sum and you take it super hard on taxes. Third risk is company forces out payments while you go work another job and you pay the same or higher taxes. Otherwise they can be very good vehicles but just do the work on them.

I’m thinking - nope it’s really just a shadow account until paid. Those funds are actually sitting with the employer. It’s actually part of the program rules from gov for NQDC plans to be at risk

[chassis]

Quote:

Originally Posted by lionfire I am in the same bucket... just became eligible and trying to see what i should do here. I am 45 and if I retire at 55, I will be eligible to get my residual stocks vesting over the next 4 years (so until 59). So I am thinking my NQDC distributions should be set to start after that (60). Thinking of just doing 10% of my salary for now... and then adjust it upwards once I get "the hang of how this works" after year1. It is a little disconcerting that the money will "vanish" and be untouchable for 15 years... which is quite a long time when anything can happen. The company itself is a very stable blue chip so not really worried about that. Just in terms of health, etc. I would imagine if anything were to happen to me, they would still give the distributions to my designated heirs. Or if I get laid off, etc. i still get to keep my deferred compensations...?

Read the plan docs re: “separation from service”. You should at a minimum keep your contributions. Company match, if any, may be subject to vesting. 15 years lockup is too long for me, I would elect periodic distributions which can be then reinvested in a taxable account.

[chassis]

Quote:

Originally Posted by ImThinkin2019 My wife's deferred pay was put into a Fidelity account so I assume if her employer got in trouble the money would not be accessible to them. Already paid out and off their books.

Are you sure? NQP distributions come from the employer, not the custodian.

[Magus]

Quote:

Originally Posted by chassis Are you sure? NQP distributions come from the employer, not the custodian.

The balance shows up in Fidelity (my last firms NQDC was with Fidelity) in your NQDC plan section but it is still at risk in bankruptcy

[chassis]

Quote:

Originally Posted by Magus The balance shows up in Fidelity (my last firms NQDC was with Fidelity) in your NQDC plan section but it is still at risk in bankruptcy

Exactly. And payments (distributions) come from whom?

[anothercog]

Decided to go for it. I'm 51 now but not so certain I'll want to work past 58 (at least full time). I'd be more hesitant if I were 40 but I'm pretty certain I'll stay at my MC until I retire. I select my disbursements to begin a year after I leave the company and to be paid out over 5 years.

I'm going to try and get my income under the magic number to maximize my child tax credits and assuming their are income limits for (hopefully) increase in the SALT deduction cap, I want to be under that too.

I can change my election each year so if my bonus doesn't pan out one year, I can dial back my contributions the following year.

This a new plan for my company. The large company we recently acquired had a plan but they made some improvements and have now rolled it out to certain individuals across the entire merged company. Assuming I need to get my income down to maximize some tax credit/deductions in the BBB Act, the timing is great.

[Magus]

Quote:

Originally Posted by chassis Exactly. And payments (distributions) come from whom?

Haven't started receiving payments yet but will next year!

[chassis]

Quote:

Originally Posted by Magus Haven't started receiving payments yet but will next year!

You will likely receive payment from your employer, using the payment means (e.g. direct deposit) you indicated when you enrolled in the program.

[jeffst]

If I recall one risk - company goes Bankrupt and you become creditor with everyone else.

Quote:

Originally Posted by anothercog I just found out I can participate in a deferred compensation plan at work. Trying to weigh the pros and cons. I already max out on my 401k and this looks like another way to defer some taxes. But taxes seem pretty low today vs future liabilities so it’s seems like a bit of a gamble. Anyone have an experience with deferred comp plans and why I should or shouldn’t consider it?

[euro]

Quote:

Originally Posted by chassis You will likely receive payment from your employer, using the payment means (e.g. direct deposit) you indicated when you enrolled in the program.

That's right - in my case, I receive the checks as well as the W2 tax statements just like I did with my regular paycheck via direct deposit from megacorp

[WhenIsItTime]

I had this available with risk of loss, company match similar to 401k, and was able to select distribution terms from 1 yr to 10. I chose 10, contributed heavily and it’s funding my first 10 yrs of retirement. I can easily control investments with access to 30 fund options.

Made sense to me to collect match. While my tax rate is still high and bit uncontrollable,, it’s lower than when I was working.

So far, so good.

Be interested to know of non qualified plan forfeiture examples.

[1242Vintage]

Contributed the max to my deferred comp 457 plan in the 12 months prior to retirement. When I left 18 months ago I moved that over into my IRA. Beyond the hassle of moving from one plan administrator to another, worked out nice for me.

[Vinnygret]

Quote:

Originally Posted by anothercog I just found out I can participate in a deferred compensation plan at work. Trying to weigh the pros and cons. I already max out on my 401k and this looks like another way to defer some taxes. But taxes seem pretty low today vs future liabilities so it’s seems like a bit of a gamble. Anyone have an experience with deferred comp plans and why I should or shouldn’t consider it?

Well, I'm not an investment expert by a long shot, but I started a deferred comp account when I first started working in 1975. I started with $5 a pay. It's worth over $100,000 now. That's all I can really tell you. As my salary increased, I put a larger contribution into the fund. It was (and still is) all in a fixed annuity. That's the extent of my knowledge. My deferred compensation was a benefit offered through my employment with my state.

[timeismine]

Great comments all around. Putting deferred compensation into a 401K that is difficult to touch is a great way to retire early.

From experience, if you retire early you may want to limit your income to qualify for government benefits available for incomes under 400% of the poverty level, which is about $63K this year. If all your eggs are in a 401K basket, every withdrawal bumps up your income.

Having a sizable amount in a taxable investment account or Roth helps you stay under this and other tax trigger levels. If you retire early and do not have benefits until Medicare, it can be good to build up post-tax investment accounts, or use a Roth account. This way you can make larger purchases without being double or triple taxed on the amount.

[thisisme543]

Can anyone confirm the tax treatment on distributions from the deferred compensation plan? My employers plan details heavily imply that 100% of the distribution is taxable at the income tax rate, including capital gains., but I've been unable to confirm that's true.

I haven't tried to do the math, but I'm wondering if it would be better to pay the income tax now, invest in a taxable account, then I only need to pay the capital gains tax rate on the increase rather than a potentially higher income tax rate.

Thoughts?

[steelyman]

I have a sense that all deferred compensation plans are not alike. Distributions from my state plan (IL) are taxed as ordinary income like a traditional IRA. I’ve only taken a small one, just to be sure it will work smoothly in the future. I believe that RMDs are mandatory but am not there yet.

[chassis]

Quote:

Originally Posted by thisisme543 Can anyone confirm the tax treatment on distributions from the deferred compensation plan? My employers plan details heavily imply that 100% of the distribution is taxable at the income tax rate, including capital gains., but I've been unable to confirm that's true. I haven't tried to do the math, but I'm wondering if it would be better to pay the income tax now, invest in a taxable account, then I only need to pay the capital gains tax rate on the increase rather than a potentially higher income tax rate. Thoughts?

NQP distributions are taxed as ordinary income.