Author Topic: Deferred Compensation Experience  (Read 3237 times)

tooqk4u22

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Deferred Compensation Experience
« on: February 03, 2016, 11:20:01 AM »
Good news is that this year I will be up there income...it wasn't like that last year and may not be like that next year, bad news is that the taxes on said income being only a w-2 puke are crazy when combined with DW income. 

However, I was informed that I am eligible to participate in the non-qualified deferred comp plan.

By my math I can significantly reduce this years federal taxes by deferring a big chunk...I am talking effective of 10% of gross income vs 25%. 

I would have to pick the amount, the date it is deferred until (not a retirement account so it can be any year in the future), how it is disbursed (lump sum or spread over a 5, 10, 20 year period), and what investments it is in (technically the money is not invested and is a liability of the company but it grows/declines in line with selected funds (all are low fee index).  I would probably go with deferral five years out and five payment plan. Should also point out that upon separation (voluntary or involuntary) the deferred payments are accelerated to that time...so no waiting.

I am not worried about the company failing and losing it....company is rock solid.  The biggest risk is that I am still working and making as much or more down the road when the deferrals start and then they would be back in the high tax bracket. 

But the way I see it is that I save taxes now, the full income set aside (ie. before tax) gets to be invested just like my after tax pay would otherwise be, and with any luck or balls it will start paying out when my taxable income is back down or non-existent. 

Anybody have any thoughts/experience with this. 

zephyr911

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Re: Deferred Compensation Experience
« Reply #1 on: February 03, 2016, 11:35:19 AM »
The first year I did real estate, I had two commissions totalling around $5K in the last part of the year. I asked my broker to pay out after the first of the year so I could show a loss for the year, since I knew the following year I was going to do a solar install and some other major tax mitigation stuff. She had no problem with it - the payments went on the following year's 1099, which I just got, and there were no hitches.

Just make sure they don't try to cut you the check early and hold it, or anything that could make it appear like it was paid in the current year.

PathtoFIRE

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Re: Deferred Compensation Experience
« Reply #2 on: February 03, 2016, 11:57:19 AM »
http://forum.mrmoneymustache.com/ask-a-mustachian/voluntary-deferred-compensation/

I though kbbmustang had a few good points of advice regarding these in the post above. To me, the biggest problem is the company risk, and you seem confident about that. It sounds like you have better investment options than I do (I have an SP500-like choice with an ER or 0.33%, otherwise they hover around 1%). As far as payout, you'll just have to decide what your timing might be like. I wish I could spread out my withdrawals, but with me likely to be far from the designated retirement age at separation, I'm resigned to the fact it will be a lump sum, and just hope I can time my exit to the very beginning of a new year to minimize taxes (and maximize 401k in addition).

mak1277

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Re: Deferred Compensation Experience
« Reply #3 on: February 03, 2016, 12:10:02 PM »
Not to get overly political, but you'll also have to consider the "risk" of tax rates increasing in the next 4-8 years depending on the outcome of future elections.

JoJo

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Re: Deferred Compensation Experience
« Reply #4 on: February 03, 2016, 12:45:59 PM »
Can you still get the payout over a number of years upon termination?

Since we're on an early retirement board I'm making the assumption that you will eventually terminate.  If they are going to make you take that as a lump sum upon termination that's a bad deal as you'd get a huge tax bill.  However, if they let you spread this over time it's OK.

Note to say:  a NQDC plan is a big part of my early retirement plan.   Upon termination I will start getting annual payments for 15 years that will take me to age 59 or so, just in time to start 401K disbursements.  Moves me from 28-33% to 15-25%. 

Find out when you are paying the FICA taxes on the deferrals.  I found one forum online that said if you are above the SS limit you may be causing SS tax later.  According to my plan that's not the case but you should check on that.

PathtoFIRE

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Re: Deferred Compensation Experience
« Reply #5 on: February 03, 2016, 12:55:10 PM »
Can you still get the payout over a number of years upon termination?

With my plan, no, it's lump sum within 45 days of separation unless you meet the retirement criteria of I believe 60 years old and certain number of years of service (I don't remember specifics since I'm 36 and will likely separate sometime in my 40s).

JoJo

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Re: Deferred Compensation Experience
« Reply #6 on: February 03, 2016, 03:29:43 PM »
Can you still get the payout over a number of years upon termination?

With my plan, no, it's lump sum within 45 days of separation unless you meet the retirement criteria of I believe 60 years old and certain number of years of service (I don't remember specifics since I'm 36 and will likely separate sometime in my 40s).

Yikes!  That would be awful.  Would put me solidly in the 39% bracket the year of termination aka retirement.

Think

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Re: Deferred Compensation Experience
« Reply #7 on: February 04, 2016, 04:29:08 AM »
This is a good question.  My husband earns 30-50k in deferred stock every year. 

tooqk4u22

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Re: Deferred Compensation Experience
« Reply #8 on: February 04, 2016, 07:16:28 AM »
Not to get overly political, but you'll also have to consider the "risk" of tax rates increasing in the next 4-8 years depending on the outcome of future elections.

Certainly a risk but expectation is that once it starts paying out our income will be significantly less so there will be cushion given the high bracket that we will be in today...worst case its a wash but the tax savings today are invested until they are taxed later on.

Can you still get the payout over a number of years upon termination?

Yes

Note to say:  a NQDC plan is a big part of my early retirement plan.   Upon termination I will start getting annual payments for 15 years that will take me to age 59 or so, just in time to start 401K disbursements.  Moves me from 28-33% to 15-25%. 

Not a bad way to approach it. Personally, I am not comfortable with 15 years no matter how strong the company....just too long of a horizon. 

Find out when you are paying the FICA taxes on the deferrals.  I found one forum online that said if you are above the SS limit you may be causing SS tax later.  According to my plan that's not the case but you should check on that.

Plan says that it is taken out upfront and not subject to FICA when disbursed. 

PathtoFIRE

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Re: Deferred Compensation Experience
« Reply #9 on: February 04, 2016, 08:42:06 AM »
Yikes!  That would be awful.  Would put me solidly in the 39% bracket the year of termination aka retirement.

Just reread my plan documents, it only allows for 3 types of withdrawals: 1) retirement defined as the later of age 60 while employed with the company or 5 years of service, and with this you can make elections for lump sum or payouts over 5, 10, or 15 years, 2) separation, in which case it's automatically paid out within 45 days in a lump sum, and 3) in-service withdrawals on elected years and schedules.

For me, I'm a high income earner, so it would never make sense to choose number 3, which would just guarantee paying at least 33% income taxes, even if I went half-time (assuming my wife continued working). As an planned early retiree, number 1 won't come in to play. So that leaves me with number 2. I had considered increasing my deferral this year, but balanced against my desire to not create too large of an account, I decided to leave it the same and collect the tax deferral over a greater number of years.

tooqk4u22

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Re: Deferred Compensation Experience
« Reply #10 on: February 05, 2016, 08:52:42 AM »
I believe I understand the plan and tax benefits/consequences, but I am struggling with the investment choices...well more the asset allocation.   Ordinarily I would be comfortable just throwing it into the S&P 500 index fund let it be what it is, but I am concerned about an effective forced sale in a market downturn because once employment ends the distributions start.  In any other account the funds would stay invested. 

Maybe I am overthinking it, solution in that case would be to just take the distribution and immediately invest it in a actual index fund. 

 

JoJo

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Re: Deferred Compensation Experience
« Reply #11 on: February 05, 2016, 10:13:04 AM »
Doesn't it stay invested in the payout period?  I believe mine does.