Deferred compensation vs. non-governmental 457(b)

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inforapenny
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Joined: Sat Jun 02, 2018 2:10 pm

Deferred compensation vs. non-governmental 457(b)

Post by inforapenny » Mon Nov 12, 2018 7:15 pm

Hello,

I wanted to ask for some advice regarding these two types of "non-qualified" tax-deferred compensation plans available to my wife and I. As background, we have already used our other forms of tax-advantaged savings (2x 401(k), 1x HSA, 2x 529) and also invest roughly a substantial amount annually after-tax from stock-based compensation.

We have roughly 50k in additional pre-tax salary-based compensation that we have earmarked for investing and need to decide whether to use one, both, or neither of these tax-deferred options. We are in the 39.6% federal tax bracket and pay no state income tax currently. Here are the details of the plans:
- We understand that our investments in either plan are subject to default risk from our employers
- My plan: Employer A1-rated bond issuer, can contribute full 50k amount, invest in mix of Fidelity/Vanguard index funds, distribution on separation in quarterly installments for either 5 or 10 years.
- Wife's plan: Employer Baa1-rated bond issuer, contribute up to 18k, invest in mix of Fidelity/Vanguard index funds, lump sum distribution on a date we select at time of separation

My preference is to invest the full amount with my employer as my employer has a better credit rating and allows quarterly distribution for 10 years instead of lump sum to reduce tax hit. My wife's preference is to split between the two plans to diversify the credit risk and to set the lump sum distribution date for her plan for after my quarterly distributions stop.

Any advice is appreciated.

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mhc
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Re: Deferred compensation vs. non-governmental 457(b)

Post by mhc » Tue Nov 13, 2018 10:04 am

There are two other important factors:

1. How long before you retire?
2. How likely are you to stay with current employer until retirement?

I would hate to defer compensation to save on taxes to only leave the company and have the payouts stacked on top of income from new employer.

inforapenny
Posts: 7
Joined: Sat Jun 02, 2018 2:10 pm

Re: Deferred compensation vs. non-governmental 457(b)

Post by inforapenny » Wed Nov 14, 2018 2:28 am

mhc wrote:
Tue Nov 13, 2018 10:04 am
1. How long before you retire?
2. How likely are you to stay with current employer until retirement?
Thanks for the reply.

1. I expect that we'll continue to do some kind of work until the last kid is out of the house (~20 years)
2. Very unlikely. However, if I anticipate probably hitting "my number" if I'm with this employer for 5 more years. If that happens, I plan to pursue my "dream job" which I think will be about a 90% pay cut. So it would be kind of like retirement in that income would drop a lot and we would stop actively accumulating.

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mhc
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Re: Deferred compensation vs. non-governmental 457(b)

Post by mhc » Wed Nov 14, 2018 9:39 am

If your income may drop dramatically in ~5 years, then deferred comp sounds like a good idea. You should be able to calculate the tax savings. The tax savings has to be weighed against the hassle, risk of losing the money, and loss of control.

FWIW, I use my NQDC plan.

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