Would/did you choose Deferred Compensation?

[Rothman]

I have an opportunity to take a bonus as differed compensation, it is a non-qualified plan meaning risk of insolvency concern but from people at work a popular option for retirement savings. I am in 33% bracket now and can see I could stay at 15% (less than $73k) and bridge rest of 100k after tax in retirement from savings. What do you think? Or did you choose this. option in the past and have feedback of how it worked out?


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[samclem]

How is the plan set up for taking the money out--can you roll it all over to an IRA when you leave, or does it stay with the company as a DB plan? If you can roll the money into an IRA when you leave, that would reduce my concerns about solvency of the company, and might also give you a chance to move the money to a Roth (heard of them?) in order to reduce your taxes later.

 

[RetireAge50]

We did this last year and will do again each year. This keeps our income low enough to qualify for college tax credits in addition to saving 25% in current taxes.

 

[robnplunder]

I was offered one and didn't take advantage of it b/c my megacorp's future was iffy at the time. Once it became "safe" enough for me, I defer 10% of my salary now. I had to make sure the deferred amount does not my 401k contribution and company's match amounts.

 

[Rothman]

Thanks samclem, the money is separate from my $24k Roth (with catch-up), company retirement contribution, and after tax which is capped at $59k this year. It goes into a account with market index options and I must declare withdraw date at time of deferral, I believe this is IRS code requirement. I think the advantage of the strategy is growing money pre-tax and withdrawing at a lower tax rate than the 33% I will incur if I don't elect to defer. Again, thanks for replies


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[FlaGator]

I did, and it worked out well, BUT..........

I deferred a big portion of my pay in the early to mid-2000's, with distribution later in the decade. Rode the market up and the money came out before the big decline. Made more than enough to pay all the taxes. Pure luck

You have to look at the distribution options - how do you get the money when you leave, and does that vary based on your age at time of separation?

A major factor for ending my participation was the amount of money I had in tax-deferred vs. taxable accounts. Figured I had more flexibility over the long term if I paid the taxes now, controlled how it was invested, and had unrestricted access to the money. Life events proved that to be the right call.

 

[jebmke]

I passed on deferred comp. I had a lot tied up in NQ options, salary and bonus so I didn't want more single-firm risk. I'm using up the lower brackets now anyway with Roth conversions so it would not have done a lot of good.

 

[Chuckanut]

I did deferred compensation because the 403b investments offered to me were high fee, low performing products. The deffered comp funds had costs similar to Vanguard. I converted it to an IRA after retiring.

 

[steelyman]

I enrolled in the 457 plan much later than in the 403b plan. I didn't know what it was, but also there had been contribution limits that coupled 403b/457 (e.g., you could contribute one-half the limit to each, but not a cent more).

That treatment was lifted later and you could contribute the max to each, so I did. I also liked that you could withdraw from the 457 after a short time from separation with no penalty, regardless of age. That was attractive, since I knew I would want to leave early.

 

[Midpack]

I contributed to one for several years, and it was a good concept. But ours offered truly horrible fund choices that got worse, so I stopped contributing and withdrew it all over the next several years (minimizing tax consequences). Not a bad option if the plan itself is attractive.

 

[steelyman]

Here is the website for the deferred compensation plan offered to Illinois state employees:

http://www2.illinois.gov/cms/Employees/benefits/Deferred/Pages/DeferredCompensation.aspx

As Midpack says for his options, the fund choices aren't especially broad.

 

[2B]

I signed up for deferred compensation and I wish I hadn't.

With max 401k and HSA I'm at the higher end of the 25% bracket. I did deferred comp that saved some 25% and some 28%. I mistakenly had the first few years to pay immediately on termination. I was under the impression that I could easily change this without any pain later. Unfortunately, the pain to change this was very high so I decided to stick with my original election.

So instead of paying taxes at 25 and 28% then investing the money in mutual funds were I get favorable capital gains and dividend treatment, I will get hit with a serious cash out check as ordinary income that throws me well into the 33% bracket.

To minimize the pain I plan on making a contribution to my Fidelity Charitable Trust Fund which will probably cover the next 5 to 10 years. I'll still pay at the marginal 28% rate.

The deferred comp only had a S&P500 fund with a ~0.35% exp ratio as the only index fund.

 

[dvalley]

I use it because the 401k options suck I just do a 3% to get the employer match there and then do a 6% non-deferred contribution. I also elected to take my money when I leave the company one because it's not secure like 401k and two safety net. My thinking behind it is to lower the current taxes but if I get laid off it'll be something to fall back on.

 

[big-papa]

I did it at one of my previous megacorps - I had 5% of my salary with-held and 75% of bonuses. I chose a 10 year payout that commenced after I left. So, in January, I just got my third check.
If I had to do it all over again, I would have passed. The money belongs to the company until they pay it out - that means you're at risk if the company goes bankrupt - the megacorp I worked hasn't been doing so well that last few years.

 

[savory]

I did it and it worked great for me. My deferral was treated as a loan to the company and during the market downturn, it simply kept paying a nice return. I had to declare the final payback a few years ago. I guess the rules changed as I use to be able to change the payback dates annually. I tied the payback to my SS in order to allow me to take SS at 70. The bad news was the company went through some hard time and was ultimately acquired. I had/have a substantial amount of money saved, perhaps more than I should. But right now, I feel good that nothing will happen and I have about 7 years left for the full payout to be completed. Not sure I would have deferred as much but in my case, given the megacorp, I think I would certainly have deferred some of it.

 

[robnplunder]

I signed up for deferred compensation and I wish I hadn't.

With max 401k and HSA I'm at the higher end of the 25% bracket. I did deferred comp that saved some 25% and some 28%. I mistakenly had the first few years to pay immediately on termination.

A big no-no for me tax wise unless I quit in January (no megacorp income afterward). I set mine up to be paid out quarterly.

 

[papadad111]

A big no-no for me tax wise unless I quit in January (no megacorp income afterward). I set mine up to be paid out quarterly.

Similar issue here - have first two years of deferral to be paid out at termination.

Unfortunately am told that we Can not change this election once it is set for that funding year....

You have to look at the distribution options - how do you get the money when you leave, and does that vary based on your age at time of separation?
The effect sticks me in a super high bracket for next two or thee years, disqualified me from ACA subsidies, and paying high tax bracket.

I wish I had spread this payout over 10 years. Even with going concern risks of the enterprise , the fund choices we have are not bad - low ER, diversified well etc.

 

[523HRR]

Deferred 100% of every bonus over 20 years. Funds were invested primarily in S&P 500 index. Left in 2012, and annual payouts are now funding living expenses during gap years until pension kicks in at age 60.