Deferred Comp cashing in

[Retired2017]

I don't need the funds at this very moment and it's about 50k in California the ding is either 18 or 20%. If I retire in another state am I still dinged? Is it the same everywhere or should I just cash out?

 

[Another Reader]

Why would you not leave it there or roll it into an IRA?

 

[euro]

I don't need the funds at this very moment and it's about 50k in California the ding is either 18 or 20%. If I retire in another state am I still dinged? Is it the same everywhere or should I just cash out?

Not sure I fully understand your question. Deferred compensation will be taxed at the federal level regardless of where you reside. Are you saying that the CA state tax portion will eat 18-20%? That is pretty hefty indeed!

As I understand the situation, the answer to your question is a.) very complicated, b.) highly dependent on which state you are moving to, and c.) dependent on how the compensation is distributed (paid out over multiple years or annuitized vs lump sum, for example). Different states will have different rules. If I were you, I'd do a lot of research and/or consult with an expert specifically in the state you are moving to. If you really face a 20% tax in CA, there is a VERY good chance that you will do better waiting with the distribution until you have moved to a different state. Hard to see how it would get worse...

 

[euro]

Why would you not leave it there or roll it into an IRA?

You can't normally roll deferred compensation into an IRA. The taxman wants to be paid...

 

[MBAustin]

Deferred comp rules vary by employer and type of plan. I had to take mine in cash, fully taxable, within 90 days of ER. Ouch. However, it could have been worse - I only deferred for a few years because I realized that the tax hit when I ER'd would be massive and potentially more than the benefit of deferral. Don't know if that was the best financial decision or not, but it was painful enough with the amount that I had deferred.

 

[Bir48die]

I'm on a ten year payout plan. Taxed as normal income on a W-2 form.

 

[RE2Boys]

I suspect that since the compensation was earned in CA, it will be considered CA sourced income and fully taxable by CA regardless of where you ultimately live. And reportable and taxable in your resident state at the time you receive the funds. Most states will grant a credit for taxes paid to another state (in this case, CA).

 

[Retired2017]

I guess I could I did call them any which way I guess you get dinged even monthly pullouts. I guess the only benefit for leaving it in the 457 would be the growth?

 

[euro]

I'm on a ten year payout plan. Taxed as normal income on a W-2 form.

Those plans are often taxed by the state of residence, not the state where it was earned, but again, probably every state has different rules, so you definitely need to know what your "new" state might be before you decide. Again, hard to see how anyone would top the Cali 20%

 

[euro]

I suspect that since the compensation was earned in CA, it will be considered CA sourced income and fully taxable by CA regardless of where you ultimately live. And reportable and taxable in your resident state at the time you receive the funds. Most states will grant a credit for taxes paid to another state (in this case, CA).

Not necessarily. Here is a link that may already be dated and I'm sure only applies to Minnesota, but it is definitely not clear-cut
https://www.faegrebd.com/state-sour...compensation-employers-should-monitor-changes

 

[Retired2017]

It is 20% they told me it doesn't matter if I move to another state prior to cashing out?

 

[ncbill]

It is 20% they told me it doesn't matter if I move to another state prior to cashing out?

Can you withdraw/redeem in such a way as to meet the conditions referenced below?

Retiring and Relocating? Don't Neglect State Taxes! | InvesTrust

"Can the state I’m moving from tax my benefits?

...federal law now clearly prohibits states from taxing certain retirement income unless you’re a resident of, or domiciled in, that state.

...if you’re no longer a resident of, or domiciled in, California, that state cannot tax your pension benefit under federal law.

...The law provides only limited protection for other (nonqualified) deferred compensation plan benefits. So-called “top-hat” plan benefits that are paid over an employee’s lifetime, or over a period of at least 10 years, are covered by the law.

But stock options, stock appreciation rights (SARs), and restricted stock are not; states are free to tax these benefits even after you relocate."

 

[Drake3287]

You sound like a CALPers member like me. Yes, your Deferred Comp is fully taxable. Your confusing your retirement being free from State Income Tax if you move to another state such as Nevada or Hawaii.

If your a public employee you have until age 70 1/2 to start taking it. For me I'm putting it off as long as I can. For some people it makes sense to start taking just enough so that it doesn't change your tax bracket.

 

[Another Reader]

I was thinking of 457 plans. They can be rolled into IRAs.

 

[pb4uski]

If it is a 457 plan, then this source suggests that distributions would not be subject to taxation by California if you are not a California resident when you receive the benefits.

As a general rule California cannot tax retirement benefits that you receive when you are no longer a resident of California. Prior to 1996, the state of CA did exactly that.

PL 104–95 was enacted by Congress that year to prohibit the so called taxation based on source of earnings.

There are some deferred compensation plans not covered, but the following are covered by this law:

(A) a qualified trust under section 401(a) of the Internal Revenue Code of 1986 that is exempt under section 501(a) from taxation;"

(B) a simplified employee pension as defined in section 408(k) of such Code;"

(C) an annuity plan described in section 403(a) of such Code;"

(D) an annuity contract described in section 403(b) of such Code;"

(E) an individual retirement plan described in section 7701(a)(37) of such Code;"

(F) an eligible deferred compensation plan (as defined in section 457 of such Code);"

(G) a governmental plan (as defined in section 414(d) of such Code);"

(H) a trust described in section 501(c)(18) of such Code; or"

(I) any plan, program, or arrangement described in section 3121(v)(2)(C) of such Code, if such income—"(i) is part of a series of substantially equal periodic payments (not less frequently than annually) made for—"(I) the life or life expectancy of the recipient (or the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient), or"(II) a period of not less than 10 years, or"(ii) is a payment received after termination of employment and under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by 1 or more of sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation on contributions or benefits in such Code on plans to which any of such sections apply.

 

[orangehairfella]

I was thinking of 457 plans. They can be rolled into IRAs.

This is only true of a governmental 457. A non-governmental 457 can only be withdrawn or transferred to another non-governmental 457.

 

[Blue Collar Guy]

I don't need the funds at this very moment and it's about 50k in California the ding is either 18 or 20%. If I retire in another state am I still dinged? Is it the same everywhere or should I just cash out?

The answer is, if you move to Florida or Nevada that have no state income tax then you beat California out of their state tax. I know for a fact thats the case for New York, I have every intention of doing just what you described. In my world I have big bucks in my account. If i wait till 59.5 NY lets the first 20 K a year go un-taxed. I plan on taking it out as a Florida resident. I dont want to wait till 70.5 then get whacked with huge minimum distributions. Ill let my heirs get the step up value when I croak. I dont know if i would move to save 20 % on 50 K, the move might cost me more.

 

[523HRR]

in California the ding is either 18 or 20%.

I thought the top income tax rate in CA is 13.3%. Can you elaborate on where this 18-20% comes from?

 

[Retired2017]

Yes it's 20% no matter where I go they said that's federal and they take it from the top! They will also hold 2% for California too that I may save it not much there. I may just cash it and buy property in either Nevada or Florida.

 

[Retired2017]

I called again

 

[pb4uski]

You may be confusing withholding with what you ultimately pay in tax. They will withhold 20% for federal taxes but when you do your return you actual taxes are less, then you'll get a refund for the difference so you net cost will be the 20% net of the refund.

 

[Retired2017]

Thank you- I believe you clarified that correctly!

 

[Scuba]

I suspect that since the compensation was earned in CA, it will be considered CA sourced income and fully taxable by CA regardless of where you ultimately live. And reportable and taxable in your resident state at the time you receive the funds. Most states will grant a credit for taxes paid to another state (in this case, CA).

+1
CA is very aggressive about recovering taxes relating to $$ earned in CA, regardless of where the person getting the compensation lives now.

 

[Travelfreek]

The big benefit to withdrawing 457 funds is you can do it early withdrawal penalty free at any age. Yes -the withholding tax is 20 % fed + 2% of the fed amount if you are a CA resident. Withholding tax is mandatory but gets sorted out the following April 15th. You would not pay the 2% if you were a NV or FL or TX resident at time of withdrawal. The big plus to these funds is no age requirement-you just have to be separated from employer to get the money. For someone retiring (FIRE'ing early and young), this is a nice way to get money.