PSA: Deferred comp payout election

[corn18]

I started contributing to my deferred comp plan a few years ago. I was always in the top tax brackets, so this looked like a good way to save some tax. I had to made an election for payout each year and I cannot change it. I elected termination/retirement + 6 months as the start and 5 years as the payout period. Seemed ok at the time.

I retired 12 Mar 2021 and my first deferred comp payment will be in Sept of this year. That's fine except I will be in the top fed and state tax brackets this year with all the severance and RSUs. So no tax savings. I should have elected a start date of termination + 1 year to put the first distribution into the next year. Oh well. Lesson learned that I will never need but others might find useful.

 

[savory]

You're not alone. I took mine over 10 years, ending when SS/IRA started. Actually, I miscalculated and it would have overlapped with my IRA until that was moved to 72. It will still overlap with SS.

Knowing what I know now, I should have completed that withdrawal 5 or so years ago in order to have provided more room for Roth conversations. Tax wise it would have been helpful.

On the other hand, I could not be happier with my decisions in general, at least in terms of my financial situation, especially when I consider where I wanted to be financially at this point in my life, 40 years ago.

 

[T-Minus]

I elected to take my Deferred Compensation over a five-year period, starting the end of the first year after retirement. Sadly, had I taken a lump sum payout, I would have been eligible for Obama Care subsidies *and* the last three stimulus payments by managing my taxable income accordingly. But, who knew? At the time, I made the prudent decision and my plan was to enjoy five years of Deferred Compensation payments, then two previous retirement payments would kick-in, along with reduced expenses via Medicare eligibility. Oh well....slightly less national debt for my grandchildren to pay.

 

[bada bing]

My ex-employer's NQDC default payout is 14 months post severance, which I never changed. My NQDC pays out next November, all in one lump. My account equals about 1 year of employed pay, so the tax consequences aren't draconian. It just amounts to year where my taxable income doesn't allow for prudent Roth conversions. The terms are that I can change the payout timing, but if I elect to change, the earliest I can start receiving money is 5 years from election - so 2026.

14 months is a pretty good default, considering it has to be optioned while still somewhat ignorant of your likely severance situation. It puts the payout most likely in the tax year after severance. My old mega-corp is looking good financially, but a lot can change in 6 years. I would have no recourse to the money if mega-corps finances failed in the interim. One of the downsides to NQDC is the money isn't yours legally until you take possession of it, unlike qualified accounts.