Supplemental Retirement Plan - Salary Deferment

[refi]

Was trying to search for this topic, but have an offer to sign up for an SRP/ Salary Deferment. Basically a company backed extension of my 401k. I can defer up to 50%. Questions:

1) Is it of value to sign up? I can have more pre-tax dollars put in, but also, there is risk of my company folding (unlikely, but who knows?), it's a megacorp around 40B market cap.

2) If I do how much do I put? Thinking I should just put 5-10% to get some tax savings? Once I pull funds out, I'll be at a lower tax bracket. Aiming to FI in 2-3 years or sooner.

I suppose it's really up to me to gauge the risk and whether I can better spend the money myself. Seeing if any insights from people here.

--------------------------------------

Details:
42/m
HCOL
NW: 5.1M
AA: 2.5/2/.5 - RE/Equities(1.2M post tax)/Liquid
FIRE Target: 6-7M

Salary: 550k
-------------------------------------

 

[big-papa]

Was trying to search for this topic, but have an offer to sign up for an SRP/ Salary Deferment. Basically a company backed extension of my 401k. I can defer up to 50%. Questions:

1) Is it of value to sign up? I can have more pre-tax dollars put in, but also, there is risk of my company folding (unlikely, but who knows?), it's a megacorp around 40B market cap.

2) If I do how much do I put? Thinking I should just put 5-10% to get some tax savings? Once I pull funds out, I'll be at a lower tax bracket. Aiming to FI in 2-3 years or sooner.

I suppose it's really up to me to gauge the risk and whether I can better spend the money myself. Seeing if any insights from people here.

--------------------------------------

Details:
42/m
HCOL
NW: 5.1M
AA: 2.5/2/.5 - RE/Equities(1.2M post tax)/Liquid
FIRE Target: 6-7M

Salary: 550k
-------------------------------------

I assume this is a deferred compensation plan? If so, it's not really an extension of your 401K, though if yours is like mine was, it probably has the same investments available as your 401K.

You are correct about the risk of your employer going belly up, as the money is carried on their books and doesn't become yours till they actually send you a check. For most established corporations, that's a pretty low risk.

When I was in mine, I put all bonuses in the plan and about 5% of my paycheck. I was in my early 50's and was convinced that this was my last employer before I retired. The universe had other plans, however.

The result is that the plan went into payout mode in January of the following year - I had had it set up for a 10 year payout. Our plan did give those enrolled the ability to change the payout, but they were limited only to lump sum or 10 year and the frequency in which you could change that was extremely limited and the ability to change payout was only available before payout started. Once payout started, there was no stopping it. So instead of deferring the compensation until retirement, I was basically getting the money back in annual installments while still working and paying taxes at whatever rate I was at during that time. Not really a win for me at all.

I finally received the last installment early this year, exactly 1 year before I am set to retire.

Knowing what I know now, I would not have participated and would have been better off investing the same money.

For you, though, with a very short window, it might be a good deal, but it really depends on your exact tax situation and how payouts will be made. Those are details that ultimately drive these things. Unlike a 401K or IRA (until RMD's kick in), these plans generally force a payout back to you. As you say, you're reducing your income today for the hope that you're in a lower tax bracket tomorrow. You might want to set up a spreadsheet or use some tax software to check out a few different scenarios to see if you end up with a net positive result.

Cheers
Big-Papa

 

[racy]

I participated in a plan for several years. As I recall I had to choose ahead of time when I'd receive the income (5 years, at retirement, etc). In the end I found this to not work too well regarding taxes. Looking back, I would not have participated, although I admit I wasn't that educated on the pros/cons back then.

 

[copyright1997reloaded]

Was trying to search for this topic, but have an offer to sign up for an SRP/ Salary Deferment. Basically a company backed extension of my 401k. I can defer up to 50%. Questions:

1) Is it of value to sign up? I can have more pre-tax dollars put in, but also, there is risk of my company folding (unlikely, but who knows?), it's a megacorp around 40B market cap.

2) If I do how much do I put? Thinking I should just put 5-10% to get some tax savings? Once I pull funds out, I'll be at a lower tax bracket. Aiming to FI in 2-3 years or sooner.

I suppose it's really up to me to gauge the risk and whether I can better spend the money myself. Seeing if any insights from people here.

--------------------------------------

Details:
42/m
HCOL
NW: 5.1M
AA: 2.5/2/.5 - RE/Equities(1.2M post tax)/Liquid
FIRE Target: 6-7M

Salary: 550k
-------------------------------------

You may (or may not be), referring to a 409A plan.

Due to a "quirk" in my mega-corp's executive compensation (409A) plan, I was able to enroll in it for a couple/few years before I retired. Yes, as I remember I had to select the number of years of payout (max 10), and yes these come from employer funds (thus risk in terms of employer viability).

My strategy was max out 401K + 401k employer match, followed by putting as much money a possible in this. The money was taxed (for social security/Medicare purposes) but no other taxes (federal/state) until withdrawal. My reason for doing this is that when I retired, at 51, I wanted *some* additional money (over my pension) to bridge to social security at 62 so that I wouldn't have to tap my 401k (which I couldn't do since I was under 55 unless I went the SEPP route).

In the end, I ended up going back to w*rk as an adjunct faculty and then full time, so I really didn't need to do the above. My last payment was in 2019, so no more employer risk (on that item). All in all, it went fine.

I think the question becomes pay taxes now or later (over that 10 years). In retrospect, I have too much of my asset base in tax-deferred accounts which will be a problem come RMD time.

 

[HarveyS]

I participated in my mega corps plan for many years. Putting away tax deferred was a great deal for me. Company also matched some amount, maybe 6%. I elected payout quarterly over 10 years, starting 6 months after leaving employment. For the last several years I have paid federal tax on the payouts at a much lower bracket than when I earned the money. And, I no longer pay state income tax on that money as I moved to a no state-tax state. It's been a huge benefit to me. Had I to do it over again, I would do the same - but be more aggressive in my investment selections. I think I put 30% of my salary and 50% of bonus in the plan each year. I'll have all my money out of this plan before RMDs kick in.

 

[rk911]

what happens if your company is bought out? me? i'd rather have 100% of my salary less whatever i've put into a 401k.

 

[oiseux]

I've done this for a short term --- 3 to 4 year term. I'm thinking the company has good visibility in this time frame, but of course anything can happen. My marginal tax rate is high, though, 37%, so the spread post FIRE is pretty good. I've basically done 100% of my bonus the last three years, plus a little salary.

 

[bada bing]

I had about $100K in my NQDC when I retired. The default distribution was a lump sum paid 14 months after severance and I got that lump sum - and the tax bill - last year. The one gotcha is that in my plan there was a minimum 5 year lead time to change distribution schedule. If I would have wanted to change it, the soonest a new distribution would be made was 5 years after the change was submitted.

Another thing to check is what is the money held in ? In my plan the only option was a target date fund based on your age. I was in the 2025 target date fund the whole time I had a NQDC plan balance.

I never put elective salary deferrals in my NQDC and I'm not sure I was even eligible for direct salary deferrals. The money came from company 401K match that was locked out of my 401K because I always max'ed the total 401K plan contribution limit by April of each year. My company 401K match from April - Dec was diverted into NQDC. I used to front load my annual 401K contributions up to the overall limit to utilize "Mega-backdoor" Roth conversions. The Roth conversions were the objective, the NQDC balance was just a side effect.

 

[euro]

Based on the limited info provided, I’d think you are an excellent candidate for taking advantage of the plan. At your income level you are pretty much taxed at maximum and deferring, say half of your salary could have a huge impact. Each of these plans are slightly different in terms of payout, so the devil is in the details a bit. Mine had a great variety of payout options and investment choices, so for me, it worked exceptionally well. I was able to schedule a very significant annual payout for each and every year between retirement and age 70 when SS and RMD start kicking in.
As far as risk, check with your plan administrator. Mine had significant insurance agains default, plus the company is/was a rock stable megacorp. Really, no concerns there. But as others keep telling us: YMMV

 

[David3]

I have had this opportunity twice in my career. The first time I was in my 30's. I signed up and put a few $ away. It ended up getting paid out to me about 10 years later due to merger/acquisition impacting the org. So I got to pay an even bigger tax bill that year. The second time was in my 50's when ER was on the horizon. I put 90% of my bonus and 10% of my base in for a couple years with a 3 year payout plan. My thinking was that it would give me a 3 year income stream in early retirement to buy time before I have to tap into my other savings. Also, all the deferred income would have been taxed at the top marginal rate, so I avoided quite a bit of income tax. My first 1/3 will be paid shortly and I am very happy to be getting it instead of tapping into other accounts in a down market.
Summary - would not advise doing it in your early career, but when ER is on the horizon it is a great added tool for managing cash flow and taxes.

 

[Franklin]

Was trying to search for this topic, but have an offer to sign up for an SRP/ Salary Deferment. Basically a company backed extension of my 401k. I can defer up to 50%. Questions:

1) Is it of value to sign up? I can have more pre-tax dollars put in, but also, there is risk of my company folding (unlikely, but who knows?), it's a megacorp around 40B market cap.

2) If I do how much do I put? Thinking I should just put 5-10% to get some tax savings? Once I pull funds out, I'll be at a lower tax bracket. Aiming to FI in 2-3 years or sooner.

I suppose it's really up to me to gauge the risk and whether I can better spend the money myself. Seeing if any insights from people here.

--------------------------------------

Details:
42/m
HCOL
NW: 5.1M
AA: 2.5/2/.5 - RE/Equities(1.2M post tax)/Liquid
FIRE Target: 6-7M

Salary: 550k
-------------------------------------

Ive had experience with these plans ( mid 7 figure balance). Overall positive and worthwhile. I retired at 62 and had the deferred balances payout over a 10 year period taking me up to 72 (RMD time). I am 66 today and have nearly 5 years of payouts. It has been a great way to extend myself financially out to SS @70 and RMD at 72. I investigated the risk of default and it seemed remote (mega corp and plan balances secured w/gty and Rabbi Trust). You can investigate history of defaults (seems unlikely as most buyers of MEGA companies assume the deferred comp obligation). But, like many have said it aint 100% unless the check clears. Personally Ive gotten over that worry. The only downside Ive seen is that most states (I was from Cali) insist that even if you move outta state you owe the departing state tax to them regardless to whether received in a no tax state. (they argue the state where u earned the $'s have a claim regardless of where u live when payout begins). One exception is that "if u spread the payment out over 10 years with equal payments" you can claim your new state governs the state tax claim. Part of my balances were invested and received shorter than the 10 year rule so it has me paying Cali taxes even though i completely moved 3 years ago.(appealed to the Cali Franchise Tax Board but was denied) If you have this situation PM me and Ill share further. Overall Ive been pleased with the program.

 

[HarveyS]

... It ended up getting paid out to me about 10 years later due to merger/acquisition impacting the org. So I got to pay an even bigger tax bill that year. ...

However, the deferred comp grew tax free for 10 years. I don't know for sure, but suspect you came out ahead taking that into account.

I knew people who didn't like receiving stock options because they caused higher taxes down the road. I say, bring it on!

I am a big fan of supplemental retirement plans. Mine is working out great.

 

[HarveyS]

The one gotcha is that in my plan there was a minimum 5 year lead time to change distribution schedule. If I would have wanted to change it, the soonest a new distribution would be made was 5 years after the change was submitted.

As far as I know, the change to a 5-year waiting period was due to Enron execs cashing out. Literally days before the company sank.

 

[refi]

Thanks for all the feedback everyone.

I ended up electing 20% at distribution +5 years after separation distributed over 5 years.


- Chose 20% since I'll max out my 401k and HSA and still wanted after-tax money if I were to buy some more properties and give flexibility. Also, although the company will likely not fold, this money isn't guaranteed.

- Did +5 years after separation b/c although I think this will be my last employer, who knows? I thought I was going quit last year but still on the OMY grind. I don't think i'll do any longer than +5 years.

- Did distribution spanning 5 years, so not to incur a heavy lump sum tax.

Who knows if I made the right choice, but this is what I went with, let's see how it goes. Anyway, the risk isn't that high and I have an open enrollment next to update things.

 

[Franklin]

Thanks for all the feedback everyone.

I ended up electing 20% at distribution +5 years after separation distributed over 5 years.


- Chose 20% since I'll max out my 401k and HSA and still wanted after-tax money if I were to buy some more properties and give flexibility. Also, although the company will likely not fold, this money isn't guaranteed.

- Did +5 years after separation b/c although I think this will be my last employer, who knows? I thought I was going quit last year but still on the OMY grind. I don't think i'll do any longer than +5 years.

- Did distribution spanning 5 years, so not to incur a heavy lump sum tax.

Who knows if I made the right choice, but this is what I went with, let's see how it goes. Anyway, the risk isn't that high and I have an open enrollment next to update things.

Hay Refi, the way I see it is you seem good either way. A good problem to have.You are in a fortunate group. You don't see too many of these plans as they are restrictive to the more senior associates. There are several firms that advise you along the deferred comp journey when u have questions. Ive found they are worth the price.