Withdrawing from deferred income plan

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Topic Author
hoeboe
Posts: 55
Joined: Tue Jul 06, 2010 10:43 am

Withdrawing from deferred income plan

Post by hoeboe » Sat Nov 16, 2019 7:47 am

[tl:dr] version. Do I simplify non-qualified deferred comp payout by changing all distributions to lump sum even though I'll end up with some significant income gap years that I'll have to cover from taxable savings?

I have been participating in a non-qualified deferred compensation plan at Megacorp for 15 years. I can defer a certain % of base and bonus pay pre-tax each year. It has proved a good decision for me (I am well aware of the risks) and represents about 15% of my overall savings. My other savings are in taxable (59%) and deferred 401k/Roths/HSA (26%).

For reference, I typically file in today's 32% to 37% tax bracket depending on stock option exercise and I'll withdraw in the 12 or 22% bracket.

I will retire in a few years and use this account to cover much of my expenses over the next decade. If you're not familiar with these plans, they have an arcane set of rules regarding distributions. The most egregious is when you make a change, you must push it out by 5 years. The options for distribution are lump sum or spread over 5 or 10 years.

So, for example if I deferred income in 2018 for 6 years and have specified to distribute a 5 year installment, payout will be 20% per year in 2024, 2025, 2026, 2027, and 2028. If I change to lump sum, it now must be 100% in 2029 (or later).

Here's my question: I am enrolling for the 2020 plan year and I have a mish-mash of distribution elections in previous years since I was trying to "smooth it out." This means combos of 5 and 10 year distributions stretched over about 12 years. I want to simplify and clean it up. There is also the possibility that I will suffer the dreaded "one more year" syndrome when the time comes and I want to be able to push out distributions in the early years to accommodate. The current plan makes that difficult- I'd have to change multiple years.

What I am considering is to change all my past (and future) distribution elections to lump sum. This simplifies my withdrawals and if I want to push anything out down the road, I only have to change one year's election. Basically, bite the bullet now and simplify.

Here's what the net is in terms of my spending requirements. For example, at age 51, my "Now" distribution adds up to about 108% of my budget. At age 54, my "New" distribution is 0 and I have to cover all my spending from taxable.

Code: Select all

Age          50    51    52   53   54    55   56   57    58   59   60   61  62
Now         65%  108%   80%  95%  45%   63%  75%  65%   56%  39%  88%   9%  5%
New         67%   60%   67%  67%   0%   19%  47%  87%   97%  86%  89%  61%  0%
The good: simple. easy to push out since i would simply change one election to happen at the end of the cycle.
The bad: I have a few low (even 0) % years, requiring me to cover the gap from my taxable accounts (plenty available). I also reset the clock and would have to delay another 5 years if I make changes down the road.

What would you recommend, if you've ever gone through the same planning?

Thanks!
-Hoeboe

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Stinky
Posts: 2487
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Withdrawing from deferred income plan

Post by Stinky » Sat Nov 16, 2019 9:48 am

hoeboe wrote:
Sat Nov 16, 2019 7:47 am
It has proved a good decision for me (I am well aware of the risks) .....

For reference, I typically file in today's 32% to 37% tax bracket depending on stock option exercise and I'll withdraw in the 12 or 22% bracket .....

I will retire in a few years and use this account to cover much of my expenses over the next decade.
-Hoeboe
Given the differences in tax rates, I'd push as many of the distributions beyond your retirement date as I could, assuming that I was highly confident that MegaCorp would be able to pay me a decade or more in the future. Hopefully you're getting a decent rate of return on the deferred funds while they're still held by the company.

If I didn't have confidence in MegaCorp's ability to pay, I'd take it all as soon as I could get it.

The pattern of payouts (lumpier vs. smoother) is a matter of personal preference, so long as you have enough cash from all sources to cover your expenses.
It's a GREAT day to be alive - Travis Tritt

D-Dog
Posts: 73
Joined: Sun Dec 02, 2007 12:44 am

Re: Withdrawing from deferred income plan

Post by D-Dog » Sat Nov 16, 2019 12:07 pm

hoeboe wrote:
Sat Nov 16, 2019 7:47 am

What I am considering is to change all my past (and future) distribution elections to lump sum. This simplifies my withdrawals and if I want to push anything out down the road, I only have to change one year's election. Basically, bite the bullet now and simplify.
In my deferred comp plan I can push out the distributions only once. You might want to check your plan to make sure that pushing out past distributions now doesn’t limit your flexibility to do so again in the future.

Also, why push them out now? If your company begins to have financial problems you might regret this.

I’ve considered changing all of my future contributions to an immediate lump sum payout at retirement. I feel like this protects me more if my company starts showing signs of having financial problems, and then as I get closer to retirement I can push them out if their financial condition still looks good.

I believe with my plan I need to make changes at least a year in advance of taking distributions.

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FiveK
Posts: 7860
Joined: Sun Mar 16, 2014 2:43 pm

Re: Withdrawing from deferred income plan

Post by FiveK » Sun Nov 17, 2019 2:00 am

hoeboe wrote:
Sat Nov 16, 2019 7:47 am
The bad: I have a few low (even 0) % years, requiring me to cover the gap from my taxable accounts (plenty available).
That's not necessarily bad, if you can do tax gain harvesting and/or traditional to Roth conversions at unusually low tax rates.

We're not quite halfway through withdrawals from our own Megacorp plan and so far so very good. Most of the payments started a year after retirement and go for 15 years, but others are probably a mish-mash similar to yours. Based on hindsight, starting deferrals later and stretching them longer (to offer more of those gain harvesting and low tax conversion opportunities) would have been good. Of course, if Megacorp were to declare bankruptcy tomorrow that would not be so good.

Topic Author
hoeboe
Posts: 55
Joined: Tue Jul 06, 2010 10:43 am

Re: Withdrawing from deferred income plan

Post by hoeboe » Sun Nov 17, 2019 8:09 am

Stinky wrote:
Sat Nov 16, 2019 9:48 am
hoeboe wrote:
Sat Nov 16, 2019 7:47 am
It has proved a good decision for me (I am well aware of the risks) .....

For reference, I typically file in today's 32% to 37% tax bracket depending on stock option exercise and I'll withdraw in the 12 or 22% bracket .....

I will retire in a few years and use this account to cover much of my expenses over the next decade.
-Hoeboe
Given the differences in tax rates, I'd push as many of the distributions beyond your retirement date as I could, assuming that I was highly confident that MegaCorp would be able to pay me a decade or more in the future. Hopefully you're getting a decent rate of return on the deferred funds while they're still held by the company.

If I didn't have confidence in MegaCorp's ability to pay, I'd take it all as soon as I could get it.

The pattern of payouts (lumpier vs. smoother) is a matter of personal preference, so long as you have enough cash from all sources to cover your expenses.
Thanks for the advice. I've thought about maximizing the amount I defer for the next 3-4 years and "live off" of vesting RSUs and options. I can approximately double my contributions for the next few years. I could potentially shave off over $35k in taxes by shifting income to a retired year.

As far as rate of return, I can invest these in same options as my 401k, which is extremely low cost. I am about 65/35 stocks to bonds overall and my deferred account is essentially 100% broad market bond fund. I'll have to rebalance my asset allocation as i begin to withdraw.

Topic Author
hoeboe
Posts: 55
Joined: Tue Jul 06, 2010 10:43 am

Re: Withdrawing from deferred income plan

Post by hoeboe » Sun Nov 17, 2019 8:18 am

D-Dog wrote:
Sat Nov 16, 2019 12:07 pm
hoeboe wrote:
Sat Nov 16, 2019 7:47 am

What I am considering is to change all my past (and future) distribution elections to lump sum. This simplifies my withdrawals and if I want to push anything out down the road, I only have to change one year's election. Basically, bite the bullet now and simplify.
In my deferred comp plan I can push out the distributions only once. You might want to check your plan to make sure that pushing out past distributions now doesn’t limit your flexibility to do so again in the future.

Also, why push them out now? If your company begins to have financial problems you might regret this.

I’ve considered changing all of my future contributions to an immediate lump sum payout at retirement. I feel like this protects me more if my company starts showing signs of having financial problems, and then as I get closer to retirement I can push them out if their financial condition still looks good.

I believe with my plan I need to make changes at least a year in advance of taking distributions.
Good points! My plan allows me to make changes yearly and I can make changes to a distribution as long as it begins >12 months later. The biggest catch is the added 5 years.

My urgency is that I have just a few more days to make elections for 2020 and how I structure it either continues to pile on the complications or simplifies with the lump sum. Company is stable (famous last words) and conservatively run. Has maintained steady growth, has broad product portfolio, and well-diversified customers.

My payout schedule ends up mostly the same length whichever way. Lump sum is actually a year or two shorter. If I lump sum everything to my retirement year, most of it will be taxed at the highest margins anyway, so i need to spread out the disbursements.

Topic Author
hoeboe
Posts: 55
Joined: Tue Jul 06, 2010 10:43 am

Re: Withdrawing from deferred income plan

Post by hoeboe » Sun Nov 17, 2019 8:22 am

FiveK wrote:
Sun Nov 17, 2019 2:00 am
hoeboe wrote:
Sat Nov 16, 2019 7:47 am
The bad: I have a few low (even 0) % years, requiring me to cover the gap from my taxable accounts (plenty available).
That's not necessarily bad, if you can do tax gain harvesting and/or traditional to Roth conversions at unusually low tax rates.

We're not quite halfway through withdrawals from our own Megacorp plan and so far so very good. Most of the payments started a year after retirement and go for 15 years, but others are probably a mish-mash similar to yours. Based on hindsight, starting deferrals later and stretching them longer (to offer more of those gain harvesting and low tax conversion opportunities) would have been good. Of course, if Megacorp were to declare bankruptcy tomorrow that would not be so good.
Great to hear it continues to work out well for you! I'm leaning towards upping my contribution rate and changing to lump sum payments. If I do run into my own "one more year" issues, there are a few convenient $0 years to shift the last few years of deferrals into. Whereas if I leave it alone, I'll actually need to defer those last years even longer to maximize tax savings.

Bir48die
Posts: 109
Joined: Fri Dec 18, 2015 11:25 am

Re: Withdrawing from deferred income plan

Post by Bir48die » Sun Nov 17, 2019 10:02 am

I'm in the middle of a ten year distribution plan. As a got close to retiring I met with HR administrator and they had me down as lump sum. When I initially signed up no one explained the program and I thought it would be like an IRA rollover. Well, it was not. After my initial panic attack I went back and begged the person to let me change my distribution. She is a master at being a bit sneaky so we back dated my paperwork and I chose ten years. It's nice because it end the year prior to my RMD's. Plus each year it has increased maybe 8% in payout due to market returns.

If I had taken lump sum I would have paid taxes on approximately $425k.

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