Any experience with deferred compensation plans?

[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?

 

[savory]

Worked out well for me. I can’t tell you how my net worth was helped or reduced. But it allowed me to retire with piece of mind. I elected payments through the beginning of SS and with my pension, I barely touched my investments.

The one thing I do wish I paid more attention was to have left more tax space for Roth conversions. Even saying that, I do not regret my choice.

I retired at 54 but did some part time “hobby” work for about 3 years which was not required in retrospect.

 

[Montecfo]

do the deferred funds earm a return? or is it just tax arbitrage?

I have participated in and designed some nonqualified deferred comp plans. Is that what this is?

 

[ImThinkin2019]

I highly recommend you max out what you can defer. In our case, my wife deferred about 50% of her pay, and set up the payments to occur over a 10 year period starting at age 62. This makes it easier to defer Social Security to age 70.

She put a little of her deferred salary into equities and the rest in cash.

The only regret we have is that I continued working for a couple of years past 62. So we did not really need the income at that time. We just reinvested it in taxable accounts.

Now I am retired and the income is welcome.

If you are in the Corporate word, the future is unpredictable. I thought I could stay with my Corp forever but I got a new young whippersnapper boss who decided I was paid too much and kicked me out. I have met other people with similar stories. Best to prepare yourself so you can go when you need to.

 

[Magus]

I assume this is a non-qualified deferred comp plan? I've participated in two of them. There are pros and cons. If there is any match, you should definitely put that amount, beyond that it depends

1) How's your company's balance sheet? Deferred comp plans are at risk in bankruptcy unlike 401ks and you'll be behind any secured creditors technically although a lot of bankruptcy judges will still let employees be whole
2) Will you continue to work if you leave your current job? Deferred comp typically must come back to you within 5 years after leaving (some longer - just check) so if you save a large amount and go to another job, you could end up paying a much higher tax rate if your investments also do well and new job is higher pay. If you plan on retiring after this company, probably worth putting a good amount in.

I did a bit more than I needed at both companies to get the company match. My last company I just left in late October, I saved + gains of about $200k so I'll now get back about $40-45k/year for the next 5 years, at a similar bracket to what I saved in - so no huge tax arbitrage since I'll be at a similar total comp (except last year will be much higher). However, the company match part of that $200k is of course all gains. If you have any other questions, please ask - I asked a ton of questions the first time and am fairly well versed.

 

[savory]

One caveat. While deferred, the money can be treated as unsecured debt in a bankruptcy. I do not have the knowledge of where in the bankruptcy pecking order a company would dip into those funds. So, you may want to understand that potential issue. In other words, it is not yours until it is paid to you. At least that is how I now understand it


That caused some concern for me when my division was sold to another mega corporation. It turn out that the change was seamless to me.

 

[racy]

Make sure to plan the distributions, too. You don't want to be surprised by taxes.

 

[pacergal]

We had a 457b govt. deferred comp. Both DH and I participated. We don't have numerous choices, but enough in all of the major groups to be well diversified, and there is a guaranteed % cash option also.
We left it there when we retired, as the administrative cost is minimal.

Be sure to read all of the documents associated with the plan so you understand it well.

 

[PaunchyPirate]

I contributed to a non-qualified deferred comp plan in the early 2000's. As other's have said, a primary risk is that it is not a "secured" investment. If your company goes belly up, then you could possibly lose it all.

I envisioned that I would contribute to it for years and then upon retirement, I would take the money out in installments spread out over multiple years.

In my situation, my company was purchased by another company who did not have such a plan. They ended the plan and I was forced to take the entire amount out in one lump sum. I was in my peak earning years and this added a large amount to on top of that. I paid a huge amount of taxes on the distribution. I don't know if I actually made any money on the plan or lost it due to taxes.

Nice concept. Great if it all works out according to plan. Possibly not so great if plans change.

 

[bada bing]

If you participate, one potential "gotcha" is the distribution plans. I ended up with about the equivalent of one year's pay in my former employer's plan. I never paid attention to the distribution rules. The default distribution for mine is 14 months after severance, which is where I left it. The rules for changing are that any changes can happen no sooner than 60 months after the date the change is submitted. If I wanted to elect pushing it out or splitting up into more than one tax year, the soonest I could schedule a distribution now is 5 years out.

I am taking the default distribution next month. It would have been smarter in hindsight to split it into the first 3-4 years after severance. I would have had to submit the elections 5 years ago to meet the requirements. The taxes and income from this are making my first calendar year of retirement a "lost year" with respect to income structuring for conversions and subsidies.

The "good part" of the issue is that my first year of retirement has basically the same annual income coming in as when I was working, just in one lump payment.

 

[anothercog]

Thanks for all the responses this far. I understand the bankruptcy concern and that certainly is a risk but my company has a very strong balance sheet and is unlikely to be acquired. We have been gobbling up other companies. No match that I’m aware of. There is advisor I can talk to so I’m going to look into this more.

I figure I’m going to continue full time for another 5 years but hope to give up some of my more stressful parts of my job and move to part time around age 57. If they don’t allow it, having an income stream from deferred compensation sounds attractive.

 

[rk911]

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?

my wife and i both worked for govt (local and state) and we both had access to deferred comp programs (457 plans). we elected to divert X% of our income to the plan into a variety of investments...equity funds, bond funds, etc. the choices are limited. we can roll the 457s into tIRA at any time. over the last 20-yrs we've had great growth...mine has tripled in value, my wife's has doubled. our only regret is not divertimg more than we did....hindsight can be a pregnant dog.

 

[anothercog]

If I’m reading my plan docs correctly it looks like I need to take a lump sum distribution 5 years after the contribution year. This could give me way too much income if I’m still working in 5 years. I’m only 51 now so I think stil working will be likely. Need to let least look into this more.

 

[Magus]

You usually can elect distributions after leaving firm too. Most plans allow distros while working 5+ years out and can redefer 5 more years if you do it at least a year before scheduled distribution as well

 

[4legsgood]

My last hurrah in the w*rking world was a public sector job and I maxed out the deferred comp. My salary checks for that 6 months were like $20. That was pretty sweet! They had good investment options, and then when I left employment and at my convenience I cashed some out and rolled some over into my ira.

 

[lucky penny]

My deferred comp was a 457b government plan with low administrative fees & many investment options, including an attractive "stable income" fund with excellent returns. No employer match, but it seemed like a painless way to save & a no-brainer.

When I started in the 1980s, the big selling point for deferred comp & IRAs was that your tax bracket would likely be lower when you eventually withdrew the funds, & as it turned out, that hasn't happened for me. So was it a smart move? Would more Roths have helped? Who knows? But it gave me peace of mind at the time & the RMDs are welcome, so no complaints.

 

[nobodyspecial]

If you're comfortable gambling with your financial compensation, this can be a great opportunity to bridge between ER and penalty-free access to other retirement funds, or RMDs.

I participated in a NQDC plan for my last 10 years at MC, until that MC was acquired by an even larger MC (who subsequently closed the plan). While in the plan, I maxed out my 401k, after-tax 401k, and NQDC contributions - truly loved getting those $20 paycheck deposits. Hard to believe, but I skimped by like a college student for a decade.

My NQDC distribution schedule was for ten years after separation. I thought the original MC would be around longer than me, so I had no qualms about gambling the pay. The acquiring MC is larger and more stable, so my thinking hasn't changed.

I retired early last year, and started receiving monthly disbursements. The balance in the NQDC plan is assigned to several "investments", which approximate returns in various Vanguard funds (so, over the last 12 years the balance has grown substantially).

Fingers crossed for the next 9 years (No Whammies, No Whammies, No Whammies).

 

[anothercog]

Ok, found a bit more. I think I’m likely to stay at my MC until I retire. I can defer my income that is currently in the 35% bracket (and probably 9% CA bracket) until I leave the company and then the balance will be paid out over 5 annual installments after I leave the company.

Assuming I leave before 65 this would like make me ineligible for ACA subsidies but still could be a good deal nonetheless.

 

[chassis]

Two thumbs up for an NQP or deferred compensation plan.

A previous employer matched NQP contributions to a threshhold. Very beneficial.

Payout optionality is very good.

Counterparty risk is there, but in the vast majority of cases I think this is of no practical concern.

 

[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...?

 

[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]

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.