Deferred Compension tax treatment question

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jazman12
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Deferred Compension tax treatment question

Post by jazman12 » Tue May 22, 2018 11:31 am

My anticipated retirement date is January 4.
I will receive supplemental retirement income for five years starting the day I retire. I believe this is considered "deferred compensation"
My question is how is this reported for tax purposes? is it considered earned income or treated like a pension or annuity?
I wanted to know if I could use it to fund a Roth IRA.
Act soon... time is running out

jebmke
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Re: Deferred Compension tax treatment question

Post by jebmke » Tue May 22, 2018 11:40 am

Normally deferred comp is not treated as compensation for the purposes of IRAs etc. It would amount to a possible double dip in that regard.

If this is an NQ plan, it will probably be reported on a W2. This will end up on Line 7 of the 1040.
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Reb Tevye
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Re: Deferred Compension tax treatment question

Post by Reb Tevye » Tue May 22, 2018 11:42 am

Hi,
According to this prior post, no you can’t. It’s not earned income.

viewtopic.php?t=238934
"So, what would have been so terrible if I had a small fortune?"

dcabler
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Re: Deferred Compension tax treatment question

Post by dcabler » Tue May 22, 2018 11:46 am

jebmke wrote:
Tue May 22, 2018 11:40 am
Normally deferred comp is not treated as compensation for the purposes of IRAs etc. It would amount to a possible double dip in that regard.

If this is an NQ plan, it will probably be reported on a W2. This will end up on Line 7 of the 1040.
Correct about NQ plans. I'm currently in payout mode on a deferred comp plan from a previous company. Each January I get a check from a company representing my former employer. Shortly thereafter, I get a W2 from them for reporting purposes.

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jazman12
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Re: Deferred Compension tax treatment question

Post by jazman12 » Wed May 23, 2018 1:15 pm

thanks for the clarifications all
Very helpful for planning purposes
Act soon... time is running out

chw
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Re: Deferred Compension tax treatment question

Post by chw » Wed May 23, 2018 1:22 pm

jazman12 wrote:
Tue May 22, 2018 11:31 am
My anticipated retirement date is January 4.
I will receive supplemental retirement income for five years starting the day I retire. I believe this is considered "deferred compensation"
My question is how is this reported for tax purposes? is it considered earned income or treated like a pension or annuity?
I wanted to know if I could use it to fund a Roth IRA.
Is this income from RSUs? It's my understanding that RSU income is considered income in the year the shares vest, and thus you could contribute to an IRA if desired.

Horsefly
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Re: Deferred Compension tax treatment question

Post by Horsefly » Wed May 23, 2018 1:31 pm

My deferred compensation all has come in as NQ retirement, reported on a W-2, but not earned income.

jbranx
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Re: Deferred Compension tax treatment question

Post by jbranx » Wed May 23, 2018 1:32 pm

I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. It is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc. It is subject to your highest federal and state bracket. Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!

dcdowden
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Re: Deferred Compension tax treatment question

Post by dcdowden » Wed May 23, 2018 1:52 pm

I receive some of my pension from a NQ supplemental plan and it is reported on a W2 and is not considered earned income from an IRA eligibility perspective, No medicare or social security payroll taxes are withheld from this income either. But this income was considered 'earned' in the year I retired, so in that year I had to pay a substantial amount of additional medicare payroll taxes. My company used my expected life expectancy to determine how much additional income was considered 'earned' at that point in order to determine the additional taxes. Fortunately, I had already maxed out the social security portion of the payroll tax, so I only had to pay the medicare portion which is 1.45%.

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Reb Tevye
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Re: Deferred Compension tax treatment question

Post by Reb Tevye » Wed May 23, 2018 4:59 pm

jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
"So, what would have been so terrible if I had a small fortune?"

Horsefly
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Re: Deferred Compension tax treatment question

Post by Horsefly » Wed May 23, 2018 7:01 pm

dcdowden wrote:
Wed May 23, 2018 1:52 pm
I receive some of my pension from a NQ supplemental plan and it is reported on a W2 and is not considered earned income from an IRA eligibility perspective, No medicare or social security payroll taxes are withheld from this income either. But this income was considered 'earned' in the year I retired, so in that year I had to pay a substantial amount of additional medicare payroll taxes. My company used my expected life expectancy to determine how much additional income was considered 'earned' at that point in order to determine the additional taxes. Fortunately, I had already maxed out the social security portion of the payroll tax, so I only had to pay the medicare portion which is 1.45%.
I think NQ supplemental pension is different from deferred income. I had both, and for the deferred income there was no medicare debt implied. I had pre-signed up with the administrator (Fidelity) to not withhold any state or federal taxes. I also had no medicare or SS tax W/H, again because it is not earned income.

For my NQ supplemental pension, the company went through a very confusing explanation of the amount of medicare taxes they were paying on my behalf (huge!). Like you said, they used an actuarial method to project the pension payments over my lifetime and figure out the medicare tax. Now that I think about it, I don't know that I actually had to pay any medicare tax on it at all. I guess if I did it just reduced my monthly check, and at this point I don't think I could back into the math on my monthly check anyway.

djscal
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Re: Deferred Compension tax treatment question

Post by djscal » Wed May 23, 2018 7:04 pm

Congrats jazman!

Yes - choosing a 10 yr payout is the key to preventing the state where the money was earned from collecting state income tax. And of course you have to really move to a state with no income tax.

I plan to move to Washington state from California to avoid paying state income tax on our nqdc and 401k money.

California can suck it!

I will be on exactly a 10 yr payout for my and the wife's nqdc money.

And since the dc money already went through payroll and SS and Medicare tax was paid (even though you didnt pay state and fed taxes) / when you receive the distribution it's not considered earned income.

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jazman12
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Re: Deferred Compension tax treatment question

Post by jazman12 » Thu May 24, 2018 9:41 am

Many thanks for all the great replies...very helpful
I just found out that I will also be eligible for an additional compensation package of 6 months severance receivable in January 2019 at the same time that the SERP begins.
So now my question is whether the severance pay getsSERP the same treatment as the SERP with respect to tax treatment and the ability for IRA options?
Act soon... time is running out

Bir48die
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Re: Deferred Compension tax treatment question

Post by Bir48die » Thu May 24, 2018 10:01 am

Severance package is earned income and will be taxed accordingly. The only difference between that and deferred comp is that severance will have SS and Medicare taxes taken out (from a tax standpoint). One thing....some companies tax deferred comp like it's a bonus and tax the crap out of it. After the second payment (out of ten) I finally changed the W-4 to reflect a normal tax structure. Between state and feds I was paying 42% withholding. Of course I got much of that back in April but really needed it for monthly overhead.

Bacchus01
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Re: Deferred Compension tax treatment question

Post by Bacchus01 » Thu May 24, 2018 10:46 am

Interesting topic and frankly one I had not considered.

How is deferred compensation treated if it is taken prior to retirement? Specifically I have a small amount in a NQ plan, about $10K. My plan states that if I leave the company today (I’m not 55 and 10 years service) that the plan will be liquidated and paid out in Jan 2019. It’s not retirement. Can’t be rolled over.

Is it earned income? It sounds like it is not based on the comments here.

Bacchus01
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Re: Deferred Compension tax treatment question

Post by Bacchus01 » Thu May 24, 2018 10:48 am

Reb Tevye wrote:
Wed May 23, 2018 4:59 pm
jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
The withholding is at that rate, but the actual tax due is at your marginal rate, no?

jbranx
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Re: Deferred Compension tax treatment question

Post by jbranx » Thu May 24, 2018 11:35 am

Bacchus01 wrote:
Thu May 24, 2018 10:48 am
Reb Tevye wrote:
Wed May 23, 2018 4:59 pm
jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
The withholding is at that rate, but the actual tax due is at your marginal rate, no?
Yes, deferred comp enjoys no special tax preference. Good luck to anyone who thinks NY state will not attempt to tax the 15-year or 10-year plus payments even if you are out of state and earned the comp there. They have done it to me twice and held my refund for months while I went thru multiple appeals. Once they learn you have it, they come after you despite knowing full well what the regs are. I've had to send them their own regs to show them why they cannot tax it.

djscal
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Re: Deferred Compension tax treatment question

Post by djscal » Thu May 24, 2018 1:01 pm

What a nightmare to have to appeal to NY multiple times when you are in the right.

Here are California's factors for determining residency from their guide: https://www.ftb.ca.gov/forms/2015/15_1031.pdf

• Amount of time you spend in California versus amount
of time you spend outside California.
• Location of your spouse/RDP and children.
• Location of your principal residence.
• State that issued your driver’s license.
• State where your vehicles are registered.
• State where you maintain your professional licenses.
• State where you are registered to vote.
• Location of the banks where you maintain accounts.
• The origination point of your financial transactions.
• Location of your medical professionals and other
healthcare providers (doctors, dentists etc.),
accountants, and attorneys.
• Location of your social ties, such as your place of
worship, professional associations, or social and
country clubs of which you are a member.
• Location of your real property and investments.
• Permanence of your work assignments in California.

Bacchus01
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Re: Deferred Compension tax treatment question

Post by Bacchus01 » Fri May 25, 2018 6:13 am

jbranx wrote:
Thu May 24, 2018 11:35 am
Bacchus01 wrote:
Thu May 24, 2018 10:48 am
Reb Tevye wrote:
Wed May 23, 2018 4:59 pm
jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
The withholding is at that rate, but the actual tax due is at your marginal rate, no?
Yes, deferred comp enjoys no special tax preference. Good luck to anyone who thinks NY state will not attempt to tax the 15-year or 10-year plus payments even if you are out of state and earned the comp there. They have done it to me twice and held my refund for months while I went thru multiple appeals. Once they learn you have it, they come after you despite knowing full well what the regs are. I've had to send them their own regs to show them why they cannot tax it.
I’m confused. If you’ve moved out of NY, how does NY even know you are drawing it?

jbranx
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Re: Deferred Compension tax treatment question

Post by jbranx » Fri May 25, 2018 10:33 am

Bacchus01 wrote:
Fri May 25, 2018 6:13 am
jbranx wrote:
Thu May 24, 2018 11:35 am
Bacchus01 wrote:
Thu May 24, 2018 10:48 am
Reb Tevye wrote:
Wed May 23, 2018 4:59 pm
jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
The withholding is at that rate, but the actual tax due is at your marginal rate, no?
Yes, deferred comp enjoys no special tax preference. Good luck to anyone who thinks NY state will not attempt to tax the 15-year or 10-year plus payments even if you are out of state and earned the comp there. They have done it to me twice and held my refund for months while I went thru multiple appeals. Once they learn you have it, they come after you despite knowing full well what the regs are. I've had to send them their own regs to show them why they cannot tax it.
I’m confused. If you’ve moved out of NY, how does NY even know you are drawing it?
I had options sales in some years which are reported and taxed in the "work" state.

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Reb Tevye
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Re: Deferred Compension tax treatment question

Post by Reb Tevye » Fri May 25, 2018 10:40 am

jbranx wrote:
Thu May 24, 2018 11:35 am
Bacchus01 wrote:
Thu May 24, 2018 10:48 am
Reb Tevye wrote:
Wed May 23, 2018 4:59 pm
jbranx wrote:
Wed May 23, 2018 1:32 pm
I've been receiving deferred comp over a 15-year period that is paid in a lump sum in January and reported on a W-2. Itt is not considered "earned income" for IRS purposes, so you can't do an additional tax deferral through an IRA etc.
...
Just in case you are from an aggressive tax state such as NY, that they will attempt to tax you even if you are out of state since the income was earned there. However, Congress passed legislation that prevents them from doing so, but I've had to appeal a couple times since not everyone in Albany seems to know or honor the tax rules!
In my experience, the state tax withholding is at the second-highest rate, and the federal is at the 22% supplemental rate. Also, in my experience the state will tax an out-of-state resident’s (ultimately upon filing the non-resident return) payouts made over less than 10 years. Payouts made over 10 years or longer are treated like a pension and are not taxed by the “work” state.
The withholding is at that rate, but the actual tax due is at your marginal rate, no?
Yes, deferred comp enjoys no special tax preference. Good luck to anyone who thinks NY state will not attempt to tax the 15-year or 10-year plus payments even if you are out of state and earned the comp there. They have done it to me twice and held my refund for months while I went thru multiple appeals. Once they learn you have it, they come after you despite knowing full well what the regs are. I've had to send them their own regs to show them why they cannot tax it.
Yikes.

“In my experience” meant what attorneys have said and what I read in regs. As I’m just getting distributions now, I have still to see what happens after filing.
"So, what would have been so terrible if I had a small fortune?"

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Reb Tevye
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Re: Deferred Compension tax treatment question

Post by Reb Tevye » Fri May 25, 2018 10:49 am

Bacchus01 wrote:
Thu May 24, 2018 10:48 am
The withholding is at that rate, but the actual tax due is at your marginal rate, no?
Right.
Straightforward for Federal.

The key question is when the original work state includes the deferred payout as taxable income to a bona fide non-resident.
"So, what would have been so terrible if I had a small fortune?"

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