Defer income or not?

[anothercog]

My MegaCorp has drastically improved their deferred comp program.

I have participated for the past couple years. I contribute a good chunk of my salary and bonus after maxing out my 401k and HSA.

Currently my plan only allows for a five year payout. The drawback of the five year payout is that taxes will be due in the state where the income was earned (California) as opposed to where I live when it's paid. The second drawback is the payment amounts over five years may be so high as to disqualify me for ACA subsidies.

The new plan will allow for ten year payouts. This will allow me to pay the taxes due in the state I then reside in vs. where earned. The longer pay out period should also lower the annual payments. The new plan will also allow me to contribute more. I can probably contribute about 65% of my pre-tax income.

Benefits of the plan are that the contributions grow tax deferred. Based on current tax rates and projected income, I can expect to save 5-6% of my federal taxes and 1-2% on my California income taxes if I remain in California and up to 9% if I move to a no tax state in retirement. I have no plans to move from California at the moment.

Drawbacks of the plan is that taxes change and who knows what the 2025 changes will bring. However, I think it's safe to say that taxes will be going up. If they go up primarily at the higher income levels, the plan will be more valuable. However, if my Company goes bankrupt, I may lose it all. That is a pretty low risk but it is not zero.

There is also a very low risk that my company would ever get acquired. But if it does the plan is held in a "Rabbi" trust that prohibits the funds from being used for anything other than plan payouts.

I'm probably about 4-9 years away from retirement.

Anyone have experience with these and if they are recommended?

 

[pb4uski]

How financially strong is your employer? Deferred comp, even if held in a Rabbi trust, are subject to the claims of creditors in the event of the employer's bankruptcy.

Would the funds in the old plan stay in the old plan or be rolled into the new plan?

 

[anothercog]

How financially strong is your employer? Deferred comp, even if held in a Rabbi trust, are subject to the claims of creditors in the event of the employer's bankruptcy.

Would the funds in the old plan stay in the old plan or be rolled into the new plan?

The company is over 80 years old and its financials are pretty solid but organic growth has been non-existent. We are too big to be acquired and too profitable to die. We'll continue acquiring other companies to grow which may eat into our balance sheet.

Pretty certain funds in the old plan will stay there and those will be paid out over 5 years after I retire. Going forward, I can elect 5 years or 10 years for new contributions.

 

[Montecfo]

I have done these at various times in my career. I always had a good view of the company's finances (as CFO or working for the CFO) so I understood the risk.

I did it was tax planning not retirement planning. And it was a 5 year deferral. 10 years seems like a long time.

These are most attractive when they figure to save you a lot on taxes. And in my case they had very attractive fixed rates of return.

That weighs in as well as how certain you are or tax savings and the dollar amount.

 

[Franklin]

Do it....been they're done that. Seems your corp has its act together. If you are gonna move Cali will follow u!! I moved from Cali about 6 years ago and still pay their state but it is deductible in your new state. Make your payouts over 10 years of equal installments and then u are fine. I could write a book on this one!!!

 

[savory]

My last payment for my 15 year deferral is early next year. I got some tax hits. My goal however was to receive payments up to the time my RMD started. I got lucky that it worked out perfectly when they pushed back the RMD age.

I sometimes wonder if my lack of financial sophistication gets in my way. My analysis was simple. I didn’t need the bonus money when it was provided. I was investing tax free. I had confidence in my company (perhaps too much).

Like all investments you run a risk. This worked out for me especially with the RMD delay. Good luck with your decision.

 

[anothercog]

My last payment for my 15 year deferral is early next year. I got some tax hits. My goal however was to receive payments up to the time my RMD started. I got lucky that it worked out perfectly when they pushed back the RMD age.

I sometimes wonder if my lack of financial sophistication gets in my way. My analysis was simple. I didn’t need the bonus money when it was provided. I was investing tax free. I had confidence in my company (perhaps too much).

Like all investments you run a risk. This worked out for me especially with the RMD delay. Good luck with your decision.

Thanks. I was thinking the same thing. With a 1O year payout I can probably avoid touching any of my investments until my RMDs start.

There seems to be a good mix of investments to choose from but I’ll likely just got with a low cost S&P index fund and a smaller allocation in a bond fund.

I hear you on too much faith in my company. I have held on to its underperforming stock for too long but it’s still too profitable to go bankrupt unless a lot goes wrong.

 

[HarveyS]

I'm very pleased with how my deferred comp is working out. Put away money that would have been taxed at 33+% (fed and state). It grew tax free. Now taking out at 18% (effective) fed rate, no state income tax.

Yes, it is money at risk. No free lunches anymore.

 

[WhenIsItTime]

Not sure 5 yr vs 10 yr changes where state tax is due. My understanding is it is due where earned. If you are already paying in those states, they you are more subject to audit risk.

I did a similar plan and elected 10 yr payout to spread it out. I accepted bankruptcy risk. I've rec'd 4 payments thus far. The tax situation is like squeezing a balloon. I deferred income in my highest earning years, but I deferred so much I am going to be in upper brackets for the full 10 years post retirement. While I'm in a lower bracket now, bracket's could go up.

I did it speculating on the tax play, but also as my company had a matching component.


I don't think it is right to call it a "bridge" to RMD's, etc. This is ordinary income that gets triggered every year automatically. It is my more conservative holding, but essentially liquidates MM and S&P 500 holdings so no different than if I had to sell other investments.

 

[HarveyS]

I deferred income in my highest earning years, but I deferred so much I am going to be in upper brackets for the full 10 years post retirement.

First world problem.

Remember that you also had all the tax deferred $ earning tax deferred. About 33% more $ invested than if you had invested after tax.

10 year take-out changes the taxation - at least in my plan. Tax is due where I live since I elected 10 year payout. My plan administrator did not automatically change withholding after I moved, I had to call and request.

 

[anothercog]

First world problem.

Remember that you also had all the tax deferred $ earning tax deferred. About 33% more $ invested than if you had invested after tax.

10 year take-out changes the taxation - at least in my plan. Tax is due where I live since I elected 10 year payout. My plan administrator did not automatically change withholding after I moved, I had to call and request.

Yes, that is what our administrator says as well. 10 year payout is taxed where I reside but 5 year payout would be taxed where earned.

I don't have any plans to ever move from California but it will be good to have that lower tax option in case I ultimately do.

 

[pjigar]

I am doing it with 10 year payout. Investing in index funds. Mainly doing for tax deferred growth and a little bit of tax saving during the payout period. Tax savings may disappear if other sources of income grow during the payout period (equity in private businesses) but I will still be is the same or lower bracket.