Deferred Comp

[Montecarlo]

I have 64k in an executive deferred comp plan.  The distribution options I have when I leave are 15 annual installments or lump sum.


What is the tax treatment and what's the best plan of attack, if I want to retire at age 34 or 35 in the next 1-2 years?


I assume I get taxed ordinary for the contributions, and capital gains on the remaining balance?


If so, if I take it as a lump sum, I'll almost certainly be paying a marginal rate of at least 32% on all of the ordinary piece, since my options will likely be paid out in a lump sum the same tax year.

Does it make sense to do the 15 annual installments instead, at what will be a 12% tax bracket?  What is the risk if the company goes bankrupt?  The accounts are with Principal and the amount is fully vested.  So to me that sounds like it's not a company asset.  But I've read deferred comp is at risk if the company goes bankrupt.

[MDM]

If this is like most NQDCs (non-qualified deferred compensation plans), all payments are considered ordinary income.

If you spread payments over at least 10 years, the state where you were living when the income was deferred cannot claw back taxes when you receive payments if you are then living in another state.  Don't know if that matters to you.

Yes, if the company goes bankrupt you stand in line with all the other common creditors.

Great deal if you have been deferring at a high marginal tax saving rate and get to withdraw while paying a lower marginal rate.  Not so great deal if the company goes bankrupt.  You pays your money and you takes your chances.

[reeshau]

Great deal if you have been deferring at a high marginal tax saving rate and get to withdraw while paying a lower marginal rate.  Not so great deal if the company goes bankrupt.  You pays your money and you takes your chances.

The company could opt to have the program insured--it's a good question to ask.  Ironically, I find it's common for smaller companies, but not common for larger ones; such hubris of "self insurance" has been the bane of many large companies lately.

[Montecarlo]

Thanks!  I hope to have the option to lump sum it the following year from retirement.  If I can't, I'll have to choose between two not so great options.  I'll probably take the risk of bankruptcy, because my marginal tax rate will drop 20% the year after I retire