Author Topic: Help with a first-world problem - executive deferred comp plan  (Read 2645 times)

ruraljuror

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Help with a first-world problem - executive deferred comp plan
« on: December 05, 2017, 09:48:20 PM »
My new employer offers a non-qualified executive deferred compensation plan. Elections are made each year and employees are able to contribute up to 90% of income. Elections are made prior to each year and include not only the percent of income but also the distribution schedule.

The distribution options are varied and complex but I would summarize them as being 1) lump sum distribution upon separation, 2) Annual distributions spread over 2-15 years.

Contributions are considered an asset of the company if it were to become insolvent/bankrupt (stable company, but you never know). Additionally, I'm limited to a 3% contribution to the company 401k.

The plan seems like it would be perfect for an early retiree to bridge the gap between retirement and traditional retirement age. However, not knowing how long I will be working with the company makes it more difficult to optimize this opportunity.

Given the risk of losing the assets if there's a bankruptcy (however unlikely) and unknown contribution horizon, how would you go about determining how much to allocate toward the account?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10717
Re: Help with a first-world problem - executive deferred comp plan
« Reply #1 on: December 05, 2017, 10:09:48 PM »
Might not be much to decide if certain tax revisions occur: nqdc new tax - Google Search.

But if NQDC plans remain viable, one makes assumptions and then acts accordingly.  The closer one is to FI, the more aggressive one can reasonably be with NQDC.  Longer payout periods will tend to reduce marginal tax rates (at least under current law).

ForeverRange

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Help with a first-world problem - executive deferred comp plan
« Reply #2 on: December 05, 2017, 10:19:22 PM »
You've hit on all the key considerations with company viability at the top of the list.  I went for it, deferred 100% the last two years and spread it over 5 years.  Would have done 15 if I'd better projected cash flow. 

ruraljuror

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: Help with a first-world problem - executive deferred comp plan
« Reply #3 on: December 08, 2017, 12:04:10 PM »
deferring 100% for two years and having a distribution of 5 years seems very aggressive. Was this to fund your first 5 years of retirement? And how did you fund your expenses for those two years?

JoJo

  • Handlebar Stache
  • *****
  • Posts: 1762
Re: Help with a first-world problem - executive deferred comp plan
« Reply #4 on: December 08, 2017, 05:25:32 PM »
My company has a similar plan - 50% of base + 100% of bonus deferable.  I've put in the max the last 3 years and chose the 15 year payout when I terminate employment.

With the stock market rise, I have a pretty good chunk in there.    Enough to pay most of my yearly expenses to age 60.

But, there are a few reasons I'm not super excited about the past decision:
* I'm in a 0 state income tax state.  If I move to a taxable state, or my state gets an income tax, it is payable on this whole amount
* with the Republican tax changes, the 0% tax tier is gone so I won't get the tax savings I initially thought
* all of the capital gains are taxable at the income tax rate


As a result, I decided to not participate in the deferred comp in 2018  (I might retire anyways).

ruraljuror

  • 5 O'Clock Shadow
  • *
  • Posts: 67
Re: Help with a first-world problem - executive deferred comp plan
« Reply #5 on: January 24, 2018, 09:28:31 AM »
Thanks for sharing your experience JoJo. I hadn't thought about capital gains being taxed at normal rate.

How did you decide on the 15-year payout? Is that how long you have before you're able to access retirement accounts?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10717
Re: Help with a first-world problem - executive deferred comp plan
« Reply #6 on: January 24, 2018, 11:06:48 AM »
Thanks for sharing your experience JoJo. I hadn't thought about capital gains being taxed at normal rate.

How did you decide on the 15-year payout? Is that how long you have before you're able to access retirement accounts?
Think of this as a traditional 401k with annual Required Minimum Distributions of 1/n, 1/(n-1), ..., 1/2, and finally 100% of the account balance.  Here, "n" is the payout length.  The higher "n" is, the less you are "forced" to take each year.  Whether a high or low "n" is good is up to you.

As an aside, I don't understand JoJo's comment about "the 0% tax tier is gone" because it certainly is not gone - it's called the standard deduction amount.

Because the NQDC is effectively a traditional plan, the larger the balance one attains there the more likely Roth contributions become favorable for 401ks and IRAs.  As always, compare marginal tax saving on contributions now vs. expected marginal tax on withdrawals later to decide.

P.S. NQDC plans were unaffected in the final version of the new tax law.
« Last Edit: January 24, 2018, 11:08:34 AM by MDM »

JoJo

  • Handlebar Stache
  • *****
  • Posts: 1762
Re: Help with a first-world problem - executive deferred comp plan
« Reply #7 on: January 25, 2018, 03:38:58 PM »
MDM ...You're right, there is the 12,000 single & more for couples that is the deduction is effectively 0%.

As for my selection of 15 years... your goal is to save taxes and spread it out over as many years as you can to be in a lower tax bracket.  It would be dumb to save taxes over say 5 years and then take it in a lump sum...you'd be deferring taxes but you might pay more due to the higher bracket.

And yes, I'm almost 44 now.  I may retire any day, I'm beyond my goal.  So 45 + 15 years payouts gets me to age 60.  Since that's after 59 1/2 I don't have restrictions on tapping into my 401(k).  If I chose to stay another year or two it would likely push back the date I need to tap the 401.   But it's nice to know I will have in the ballpark of 30-35K a year income, before tax, coming for the next 15 years (depending on the stock market)

Few other things:
* You do pay SS tax on the full amount when earned, not in payout
* If you are one who thinks Obamacare will stick around and you can get subsidies even if you have millions of dollars, I believe this shows as income that could make you ineligible for subsidies.
* due to my maximizing NQDC and part time status, I was eligible for Roth IRA the last 2 years.

obstinate

  • Handlebar Stache
  • *****
  • Posts: 1105
Re: Help with a first-world problem - executive deferred comp plan
« Reply #8 on: January 27, 2018, 08:18:59 AM »
I wish I had an option like this. My company's deferred comp plan does a lump sum payout on separation and can be spread over five years max. In other words, it's useless unless you plan on going down to something like working three days out of five, and plan on staying in that state for five years.