Deferred Comp Plan

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krafty81
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Deferred Comp Plan

Post by krafty81 »

My company is finally looking at starting a deferred comp plan. I would qualify for it. Looking for any thoughts on DC and how it works.
leftcoaster
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Re: Deferred Comp Plan

Post by leftcoaster »

It will probably reduce your company match.

It generally makes sense in the run up to retirement when you believe you are in your “last” job. Pay out begins when you separate from service and if that happens because you leave for other reasons the money will show up at marginal rates.

Make sure your employer is going to be solvent.

Choose a payout plan that works for you. Some let you avoid state tax if you move.
Misenplace
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Re: Deferred Comp Plan

Post by Misenplace »

Private Deferred Compensation plans can be a great vehicle for deferring income for several years (an in service distribution) or for a designated time period after reaching the co. retirement age. It's not a perfectly risk free proposition since your deferred comp balance is usually an unsecured debt that the co. owes the employee. If the company goes bankrupt, unless they have an insurance policy in place for the deferred comp amounts, you are last in line of the co. creditors. If I were in my early 30s, I might feel uncomfortable locking it up like that. Also, there is the prospect of a giant tax hit if one quits the company and has to take a bulk distribution. It all depends upon the plan details.

Here is a good thread fleshing out some of the issues. Deferred Comp: How long do you trust your company?
leftcoaster wrote: Thu Nov 12, 2020 10:47 pm It will probably reduce your company match.
My company matched into a Supplemental Retirement plan- it ended up being not an insignificant amount of money. The downside is that the Supplemental Retirement plan pays out in a relatively short amount of time- the longest I could get it to be was 5 years.
dcabler
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Re: Deferred Comp Plan

Post by dcabler »

I did it at a previous employer. I thought it was going to be my last job before I retired but I was unfortunately layed off which then triggered payout over a 10 year period. I was immediately employed elsewhere and my salary has continued to rise, pretty much eliminating any tax benefit I would have had. Only 2 more years of payouts and I'll be done with that and most likely retired. In hindsight I wouldn't do it again. Just too many ways for it to go south including my experience or, even worse, if the company had gone bankrupt.
Soon2BXProgrammer
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Re: Deferred Comp Plan

Post by Soon2BXProgrammer »

krafty81 wrote: Thu Nov 12, 2020 10:39 pm My company is finally looking at starting a deferred comp plan. I would qualify for it. Looking for any thoughts on DC and how it works.
i used a private DC plan, but it was a top hat style plan that kicked in after you hit the 57k limit..

this meant most people that participated, didn't put a ton in it, which limited the risk.

Don't let your DC plan be more then 5% of your portfolio.. essentially it has the risk of a single company failure, even if it is invested in something else on paper. (because DC plans typically don't actually have the money)
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Re: Deferred Comp Plan

Post by Stinky »

The attractiveness of a DC plan depends on your age.

I used one in my early 60s to push some income into my post-retirement years. It’s worked fine (so far). I still have a few years of payouts due, and I believe that my former employer is good for them.

I would not use one if I was much younger. Too many risks of employer insolvency/involuntary payout/etc as cited in prior posts.
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Re: Deferred Comp Plan

Post by TomatoTomahto »

We use one, but only up to the match amount (a low 5 digit number). Employer is sound, and it’s hard to beat the match, but we don’t expect to be in a lower tax bracket in retirement and the timing is clunky.
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hoffse
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Re: Deferred Comp Plan

Post by hoffse »

I am a tax lawyer who specializes in deferred comp.

There are many (many!) forms of deferred compensation. The term encompasses features typically found in top hat plans and SERPs, but it also includes change in control payments and promised severance pay and bonuses (among other things). I see a lot of DC in employment agreements.

It is usually beneficial for employees to participate in deferred comp, especially plans that provide for deferrals of present year income. You get to kick the can down the road on your income tax liability, and there are not artificial limits like in a 401(k) plan. However, there are some pitfalls.

Most DC is governed by a section of the internal revenue code called 409A. It’s very complex, and probably 30% of my practice is nothing more than fixing (or trying to fix) 409A problems that other lawyers have screwed up. Once a DC plan or employment agreement is signed, correcting a 409A issue becomes challenging, especially if the issue is discovered right before or during payout. Unfortunately, when there is a 409A issue that can’t be fixed, the excise tax (which feels like a penalty) falls on the service provider (you), rather than the company.

In my experience, the really severe problems tend to arise in employment agreements more often than top hat plans or SERPs, because EA’s are often drafted by employment lawyers who have no tax experience at all. Top hat plans, etc. that are adopted for multiple executives are usually prepared by tax attorneys with some executive comp or ERISA experience.

That being said, I would highly recommend you find your own tax counsel to review the document prior to signing. You need to understand your rights and obligations under the plan, including (i) where the money goes after it’s deferred (usually it’s just an unsecured liability of the company); (2) how and when you are paid and taxed; and (3) whether the DC you eventually receive is 409A-compliant to avoid excise taxes. Keep in mind too that unlike a 401(k) plan, the amount and timing of DC payouts is usually fixed and really can’t be changed under 409A. So you are taking a gamble that deferrals of present year income will result in tax efficiency for future years. Traditional DC plans are not as flexible as 401(k) plans, but you have the ability to defer much higher amounts.
dcabler
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Re: Deferred Comp Plan

Post by dcabler »

Misenplace wrote: Thu Nov 12, 2020 10:53 pm Private Deferred Compensation plans can be a great vehicle for deferring income for several years (an in service distribution) or for a designated time period after reaching the co. retirement age. It's not a perfectly risk free proposition since your deferred comp balance is usually an unsecured debt that the co. owes the employee. If the company goes bankrupt, unless they have an insurance policy in place for the deferred comp amounts, you are last in line of the co. creditors. If I were in my early 30s, I might feel uncomfortable locking it up like that. Also, there is the prospect of a giant tax hit if one quits the company and has to take a bulk distribution. It all depends upon the plan details.

Here is a good thread fleshing out some of the issues. Deferred Comp: How long do you trust your company?
leftcoaster wrote: Thu Nov 12, 2020 10:47 pm It will probably reduce your company match.
My company matched into a Supplemental Retirement plan- it ended up being not an insignificant amount of money. The downside is that the Supplemental Retirement plan pays out in a relatively short amount of time- the longest I could get it to be was 5 years.
Bold Red: That's what got me. But instead of a bulk distribution, it started the 10 year payout which I had previously selected during my employment and which can only be changed once every 5 years or so as I recall. For these to make sense you need to feel very secure about your job and very secure about the company's ability to survive. If it ever makes sense, it seems to me that it would make the most sense for somebody in their last 10 years or so of employment, if you're able to try and time the start of your payout period with the start of retirement when, hopefully, your tax situation changes for the better.
Last edited by dcabler on Fri Nov 13, 2020 6:50 am, edited 1 time in total.
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Re: Deferred Comp Plan

Post by dcabler »

Soon2BXProgrammer wrote: Thu Nov 12, 2020 11:28 pm
krafty81 wrote: Thu Nov 12, 2020 10:39 pm My company is finally looking at starting a deferred comp plan. I would qualify for it. Looking for any thoughts on DC and how it works.
i used a private DC plan, but it was a top hat style plan that kicked in after you hit the 57k limit..

this meant most people that participated, didn't put a ton in it, which limited the risk.

Don't let your DC plan be more then 5% of your portfolio.. essentially it has the risk of a single company failure, even if it is invested in something else on paper. (because DC plans typically don't actually have the money)
As I recall, at my previous company, we had the option to defer from 3 separate buckets: salary, bonuses, and commissions (if you earned commissions). I think I did 5% of salary and 50% of bonuses. From others I spoke to at the time who were at my level, what I did seemed to be about average.
toocold
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Re: Deferred Comp Plan

Post by toocold »

I signed up megacorp's non qualified deferred compensation plan. There was no limit to how much I could put money into it. I was also sure that my megacorp would not disappear.

During the last 3 years in addition to my normal contributions, I supercharged my contributions and put all my salary and bonus into it, while exercising some of my SARs to live off of. I chose between 10 and 5 year payout. I deferred the 10 year payout 5 years, so I created a 15 year annuity stream that helps bridge between my "retirement" and 65. I pulled the trigger last year.

As long as you are sure that your company is rock solid, it's a good way to defer taxes and play with future income streams. Be careful on distribution at termination. When I left, I had a significant amount of options left and I was at the highest margin tax rate, and a bulk distribution at termination would have been very bad.
Last edited by toocold on Fri Nov 13, 2020 9:01 am, edited 1 time in total.
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Re: Deferred Comp Plan

Post by MikeG62 »

krafty81 wrote: Thu Nov 12, 2020 10:39 pm My company is finally looking at starting a deferred comp plan. I would qualify for it. Looking for any thoughts on DC and how it works.
There have been a number of posts on this. Here are a few worth reading:

viewtopic.php?f=2&t=211527

viewtopic.php?f=1&t=218714

I participated in a DC plan and wrote about my experience in those threads.

The one I have participated in (and the others I have read about) were designed to allow a portion of salary and bonus to be deferred into the plan. Further, the one I was in had some company matching contributions.

Keep in mind DC plans are unsecured. So, in bankruptcy, you are in line with the other creditors.

Lastly, I would not participate in one unless I was later in my career and a high earner. I would not defer into one in my 20's or 30's. Too long a period of time for the money to be tied up. Also, if you leave your employer the money may begin to be distributed at a time when you are in an equally as high (or higher) tax bracket.
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Re: Deferred Comp Plan

Post by barnaclebob »

Covid has confirmed that I do not want to be a long term unsecured creditor to my company. We'll be fine long term but probably weren't that far from a govt bailout. When I'm a few years from retirement and if everything is looking good with the company then I might put a little money into it. Otherwise I wont lose any sleep with a slightly off nominal tax strategy.
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krafty81
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Re: Deferred Comp Plan

Post by krafty81 »

Thanks for all the great info. I should have provided a few more details.
- I am probably in my last 4-5 years of working and will stay with this company
- They are a solid defense contractor
- I live in CA - 13% tax bracket for state
- I doubt my tax bracket will change after I retire
willyd123
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Re: Deferred Comp Plan

Post by willyd123 »

I think the responses give you the key issues. I'd just share with you my experience where I deferred every cent of my bonuses over a roughly 10 year period and with earnings, etc. the total balance was roughly $2mil which was maybe 90% of my savings. The company I was with was a financial organization and "solid as a rock" or so I thought. Well 2008 happened and we were teetering toward bankruptcy. I did get my money out but the moral of the story is...everything in moderation.
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Re: Deferred Comp Plan

Post by Brain »

I only see three groups for whom a Deferred Compensation Plan (DCP) is beneficial (vice 401(k) or taxable savings):

  • Those within 10 years of retirement
  • Those who find themselves making significantly more in a given year than they expect to in subsequent years (perhaps because of a career change or a short-term high-paying job)
  • Those for whom bonuses and commissions make up enough of their compensation to cause their total income to swing between tax brackets over the course of years

Note: Even then, the second and third employee would need to know, years in advance, what their career prospects are and when those bonuses would occur and when they wouldn't.
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Re: Deferred Comp Plan

Post by MikeG62 »

krafty81 wrote: Fri Nov 13, 2020 10:37 am Thanks for all the great info. I should have provided a few more details.
- I am probably in my last 4-5 years of working and will stay with this company
- They are a solid defense contractor
- I live in CA - 13% tax bracket for state
- I doubt my tax bracket will change after I retire
Then unless there is a match on your contribution, putting money into the DC plan does not seem like it makes sense for you. The big benefit in my mind is the ability to defer income out of high taxable income years into lower taxable income years (or out of a high marginal rate into a lower marginal rate). If this is not the case for you, then I think I'd skip it as absent a match where is the value proposition (not to mention the small risk you are taking on)?
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Re: Deferred Comp Plan

Post by willthrill81 »

MikeG62 wrote: Fri Nov 13, 2020 1:28 pm
krafty81 wrote: Fri Nov 13, 2020 10:37 am Thanks for all the great info. I should have provided a few more details.
- I am probably in my last 4-5 years of working and will stay with this company
- They are a solid defense contractor
- I live in CA - 13% tax bracket for state
- I doubt my tax bracket will change after I retire
Then unless there is a match on your contribution, putting money into the DC plan does not seem like it makes sense for you. The big benefit in my mind is the ability to defer income out of high taxable income years into lower taxable income years (or out of a high marginal rate into a lower marginal rate). If this is not the case for you, then I think I'd skip it as absent a match where is the value proposition (not to mention the small risk you are taking on)?
Well, maybe. If the OP isn't already maxing out his/her Roth IRA, then that should likely be done first. But the OP may already be maxing out all other tax-advantaged accounts, so additional contributions may be limited to the DC plan or taxable. Also, we don't know if the OP is planning on deferring SS benefits to age 70 and, if so, how much room there could be for Roth conversions between retirement and age 70. The OP might want to donate significant funds to charity at some point, and that would be more efficient coming from tax-deferred accounts in the form of QCDs than taxable. Tax-deferred accounts can be used very tax efficiently to pay for significant medical expenses. Also, the OP might move to a lower taxed state in the future, which would likely favor tax-deferred contributions now. About the only way I can think of where tax-deferred could be significantly worse than taxable is if the OP is married and the OP's spouse significantly suffered from the 'surviving spouse being thrust into a higher tax bracket due to RMDs' issue.

I say all of that to make the point that there are a lot of factors that enter into the decision beyond the OP simply saying that his/her tax bracket will be the same in retirement.
hoffse wrote: Fri Nov 13, 2020 6:24 am I am a tax lawyer who specializes in deferred comp.

There are many (many!) forms of deferred compensation. The term encompasses features typically found in top hat plans and SERPs, but it also includes change in control payments and promised severance pay and bonuses (among other things). I see a lot of DC in employment agreements.

It is usually beneficial for employees to participate in deferred comp, especially plans that provide for deferrals of present year income. You get to kick the can down the road on your income tax liability, and there are not artificial limits like in a 401(k) plan. However, there are some pitfalls.

Most DC is governed by a section of the internal revenue code called 409A. It’s very complex, and probably 30% of my practice is nothing more than fixing (or trying to fix) 409A problems that other lawyers have screwed up. Once a DC plan or employment agreement is signed, correcting a 409A issue becomes challenging, especially if the issue is discovered right before or during payout. Unfortunately, when there is a 409A issue that can’t be fixed, the excise tax (which feels like a penalty) falls on the service provider (you), rather than the company.

In my experience, the really severe problems tend to arise in employment agreements more often than top hat plans or SERPs, because EA’s are often drafted by employment lawyers who have no tax experience at all. Top hat plans, etc. that are adopted for multiple executives are usually prepared by tax attorneys with some executive comp or ERISA experience.

That being said, I would highly recommend you find your own tax counsel to review the document prior to signing. You need to understand your rights and obligations under the plan, including (i) where the money goes after it’s deferred (usually it’s just an unsecured liability of the company); (2) how and when you are paid and taxed; and (3) whether the DC you eventually receive is 409A-compliant to avoid excise taxes. Keep in mind too that unlike a 401(k) plan, the amount and timing of DC payouts is usually fixed and really can’t be changed under 409A. So you are taking a gamble that deferrals of present year income will result in tax efficiency for future years. Traditional DC plans are not as flexible as 401(k) plans, but you have the ability to defer much higher amounts.
OP, I strongly recommend that you head this excellent advice.

The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
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Re: Deferred Comp Plan

Post by Soon2BXProgrammer »

willthrill81 wrote: Fri Nov 13, 2020 1:54 pm The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
I've never seen this allowed.
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Re: Deferred Comp Plan

Post by willthrill81 »

Soon2BXProgrammer wrote: Fri Nov 13, 2020 1:59 pm
willthrill81 wrote: Fri Nov 13, 2020 1:54 pm The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
I've never seen this allowed.
It depends on the plan type and details. For instance, 457 plans are DC plans, and they generally can be rolled over.

Also, the OP might be able to make all of his/her withdrawals from the DC plan, thereby draining it first and reducing the risk associated with holding it for a long time.
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Re: Deferred Comp Plan

Post by sailaway »

willthrill81 wrote: Fri Nov 13, 2020 2:02 pm
Soon2BXProgrammer wrote: Fri Nov 13, 2020 1:59 pm
willthrill81 wrote: Fri Nov 13, 2020 1:54 pm The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
I've never seen this allowed.
It depends on the plan type and details. For instance, 457 plans are DC plans, and they generally can be rolled over.

Also, the OP might be able to make all of his/her withdrawals from the DC plan, thereby draining it first and reducing the risk associated with holding it for a long time.
Since the OP said "company," it seems highly unlikely they are referring to a 457.
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Re: Deferred Comp Plan

Post by Soon2BXProgrammer »

willthrill81 wrote: Fri Nov 13, 2020 2:02 pm
Soon2BXProgrammer wrote: Fri Nov 13, 2020 1:59 pm
willthrill81 wrote: Fri Nov 13, 2020 1:54 pm The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
I've never seen this allowed.
It depends on the plan type and details. For instance, 457 plans are DC plans, and they generally can be rolled over.

Also, the OP might be able to make all of his/her withdrawals from the DC plan, thereby draining it first and reducing the risk associated with holding it for a long time.
oh, yeah.. sorry. When i read DC plans, i am assuming people mean NQDC and not a 457b government plan.

you are right, if it is a 457b gov plan, that has rollover support, but nongovernment 457b rollovers are not allowed. Also as far as I know all NQDC plans no rollovers are allowed.

The fact that the OP is referring to his employer as a company... and they are starting it.. implies it isn't a 457b gov plan.
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Re: Deferred Comp Plan

Post by willthrill81 »

sailaway wrote: Fri Nov 13, 2020 2:04 pm Since the OP said "company," it seems highly unlikely they are referring to a 457.
Not necessarily. Non-governments sometimes have their own 457 plan. The biggest drawbacks of those, compared to government 457 plans, are the generally much higher fees and, as I just learned, the inability to rollover the balance to something another than another non-government 457 plan after separating from service.
Soon2BXProgrammer wrote: Fri Nov 13, 2020 2:07 pm
willthrill81 wrote: Fri Nov 13, 2020 2:02 pm
Soon2BXProgrammer wrote: Fri Nov 13, 2020 1:59 pm
willthrill81 wrote: Fri Nov 13, 2020 1:54 pm The only thing that I would add is that there may not be much risk from the DC plan if the OP can rollover the DC balance to a 401(k) or IRA after separating from service to the employer.
I've never seen this allowed.
It depends on the plan type and details. For instance, 457 plans are DC plans, and they generally can be rolled over.

Also, the OP might be able to make all of his/her withdrawals from the DC plan, thereby draining it first and reducing the risk associated with holding it for a long time.
oh, yeah.. sorry. When i read DC plans, i am assuming people mean NQDC and not a 457b government plan.

you are right, if it is a 457b gov plan, that has rollover support, but nongovernment 457b rollovers are not allowed. Also as far as I know all NQDC plans no rollovers are allowed.

The fact that the OP is referring to his employer as a company... and they are starting it.. implies it isn't a 457b gov plan.
Thanks for pointing that out. I wasn't aware that non-governmental 457 plans didn't allow rollovers.

Still, as I mentioned, the OP might be able to drain it shortly after separating from service.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Deferred Comp Plan

Post by Soon2BXProgrammer »

willthrill81 wrote: Fri Nov 13, 2020 2:26 pm Still, as I mentioned, the OP might be able to drain it shortly after separating from service.
Yep, most plans I've seen when the deferral occurs, people have to pick the disbursement (if they have options).

The complexity is that if one thinks this is their last job and they pick something like "year following termination", and then they quit early and go to another high income job, and everything is paid all at once on top of other income, all their tax savings disappears.
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Re: Deferred Comp Plan

Post by sailaway »

willthrill81 wrote: Fri Nov 13, 2020 2:26 pm
sailaway wrote: Fri Nov 13, 2020 2:04 pm Since the OP said "company," it seems highly unlikely they are referring to a 457.
Not necessarily. Non-governments sometimes have their own 457 plan. The biggest drawbacks of those, compared to government 457 plans, are the generally much higher fees and, as I just learned, the inability to rollover the balance to something another than another non-government 457 plan after separating from service.


Non profits can offer 457's. While someone not wanting to be specific might refer to their non profit organization as their company, most choose "employer."
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Re: Deferred Comp Plan

Post by milktoast »

Depends on the details.

I'm putting absolutely everything I can into my NQDC plan. But I'm in a bit of a perfect storm for having it make sense.
- My employer allows payout for 15yrs after termination. My plan is to work here until retirement. So planned payout will be after retirement.
- I'm pretty sure my employer will stay in business for next 25 years or so.
- I'm deep in the 37% bracket. So even if tax rates change, it's very likely a net tax savings.
- My income allows me to max 401k, backdoor Roth, mega backdoor Roth, and HSA prior to putting any money into NQDC. I tune the deferral to ensure that NQDC is my lowest priority tax advantaged savings. Due to counterparty risk, it really is the worst tax advantaged way to save.
- Still able to save in my taxable account. No way I would deplete my normal savings to fund NQDC. Just slowing down my taxable savings.

To further reduce counterparty risk, I keep most of my bond allocation in NQDC. Since this is the asset class I expect to grow the least, I'm trying to minimize consequences of my employer going out of business. Also trying to minimize size of lump sum if triggered (my death or employer being purchased).

Anyway, it's great way to boost tax advantaged savings if you have exhausted every other form of tax advantaged savings. But keep in mind the extra risk you are taking and weigh it against the net difference in tax brackets.

I'm planning to retire early enough that NQDC is fully paid out before RMD kick in on my 401k. If my NQDC balances or timeline pushed unavoidable income up into the 32% marginal bracket, I would stop contributing. For a 4-5% tax advantage on the money, the risk wouldn't be worth it. There is counterparty risk (loss of funds), risk that I have to switch jobs and receive the income while still working (no tax advantage), and risk of a lump sum event (no tax advantage).

But right now I'm still filling the 12% MFJ bracket so I'm getting a potential 25% expected tax advantage on each marginal dollar. So it's worth the risk.
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Re: Deferred Comp Plan

Post by goos_news »

milktoast wrote: Fri Nov 13, 2020 2:52 pm Depends on the details.

I'm putting absolutely everything I can into my NQDC plan. But I'm in a bit of a perfect storm for having it make sense.
- My employer allows payout for 15yrs after termination. My plan is to work here until retirement. So planned payout will be after retirement.
- I'm pretty sure my employer will stay in business for next 25 years or so.
- I'm deep in the 37% bracket. So even if tax rates change, it's very likely a net tax savings.
- My income allows me to max 401k, backdoor Roth, mega backdoor Roth, and HSA prior to putting any money into NQDC. I tune the deferral to ensure that NQDC is my lowest priority tax advantaged savings. Due to counterparty risk, it really is the worst tax advantaged way to save.
- Still able to save in my taxable account. No way I would deplete my normal savings to fund NQDC. Just slowing down my taxable savings.

To further reduce counterparty risk, I keep most of my bond allocation in NQDC. Since this is the asset class I expect to grow the least, I'm trying to minimize consequences of my employer going out of business. Also trying to minimize size of lump sum if triggered (my death or employer being purchased).

Anyway, it's great way to boost tax advantaged savings if you have exhausted every other form of tax advantaged savings. But keep in mind the extra risk you are taking and weigh it against the net difference in tax brackets.

I'm planning to retire early enough that NQDC is fully paid out before RMD kick in on my 401k. If my NQDC balances or timeline pushed unavoidable income up into the 32% marginal bracket, I would stop contributing. For a 4-5% tax advantage on the money, the risk wouldn't be worth it. There is counterparty risk (loss of funds), risk that I have to switch jobs and receive the income while still working (no tax advantage), and risk of a lump sum event (no tax advantage).

But right now I'm still filling the 12% MFJ bracket so I'm getting a potential 25% expected tax advantage on each marginal dollar. So it's worth the risk.
Thanks for that detailed explanation of your strategy, milktoast. It makes me reconsider some of my choices, as it is the annual re-enrollment time for the NQDC plan. The 25% gain is impressive. I'm in the 37% margin land (plus state) but I don't see a path to the 25% because of the spouses's pension and other income. I see you have a lot more faith in your employer -- 15 years is a long time in my industry. I've take a really short period and settled on just a 12% gain. I do see I have a few more optimizations to evaluate. In my case, 100% of bonus and 75% of salary can be deferred. And we could get by at the max levels. It's just a matter of how long is that payout.
Firemenot
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Re: Deferred Comp Plan

Post by Firemenot »

I have about 550K in my deferred comp plan. I’m mid-40s. I’ve stopped contributing as they changed the plan for new contributions. My money in the plan all pays out over 10-15 years upon separation for any reason. The new plan pays as a lump sum unless your separation occurs at 55 plus, in which case the funds are then paid out per your distribution plan elections. My company is pretty much bulletproof so almost zero concerns about bankruptcy. I’ll either keep working until retirement at company or I’ll use the money as bridge income for business startup. I currently have a Covid side-business that I may elect to do full-time at some point in future.
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krafty81
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Re: Deferred Comp Plan

Post by krafty81 »

Tax-deferred accounts can be used very tax efficiently to pay for significant medical expenses. Also, the OP might move to a lower taxed state in the future, which would likely favor tax-deferred contributions now.

The comment copied from previous post is probably most applicable to me. I have maxed out everything else, including backdoor and mega backdoor, and am not sure I will live in CA forever. If they offer matching (my company is solid) makes sense to go for it, even though I doubt my federal bracket will change much.
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UpsetRaptor
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Re: Deferred Comp Plan

Post by UpsetRaptor »

Personally, I find the risk of 100% loss if my employer files for bankruptcy too big a hurdle for me to overcome for the tax benefits gained.
PowderDay9
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Re: Deferred Comp Plan

Post by PowderDay9 »

UpsetRaptor wrote: Sun Nov 15, 2020 8:41 pm Personally, I find the risk of 100% loss if my employer files for bankruptcy too big a hurdle for me to overcome for the tax benefits gained.
I think about this a lot as well and think 10% of net worth in NQDC would be a reasonable limit. However, how big of a risk is not being paid out the funds? In the last 30 years, how many large companies (>500 employees) have had a situation where they didn't pay out NQDC? Curious if anyone knows.
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willthrill81
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Re: Deferred Comp Plan

Post by willthrill81 »

krafty81 wrote: Sun Nov 15, 2020 6:33 pm Tax-deferred accounts can be used very tax efficiently to pay for significant medical expenses. Also, the OP might move to a lower taxed state in the future, which would likely favor tax-deferred contributions now.

The comment copied from previous post is probably most applicable to me. I have maxed out everything else, including backdoor and mega backdoor, and am not sure I will live in CA forever. If they offer matching (my company is solid) makes sense to go for it, even though I doubt my federal bracket will change much.
That comment was made by me. I'm glad that it was useful to you.

Will you have a pension in retirement or significant other non-portfolio income? If not, how will your federal tax bracket remain the same in retirement?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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willthrill81
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Re: Deferred Comp Plan

Post by willthrill81 »

PowderDay9 wrote: Sun Nov 15, 2020 10:53 pm
UpsetRaptor wrote: Sun Nov 15, 2020 8:41 pm Personally, I find the risk of 100% loss if my employer files for bankruptcy too big a hurdle for me to overcome for the tax benefits gained.
I think about this a lot as well and think 10% of net worth in NQDC would be a reasonable limit. However, how big of a risk is not being paid out the funds? In the last 30 years, how many large companies (>500 employees) have had a situation where they didn't pay out NQDC? Curious if anyone knows.
Jim Dahle of the White Coat Investor site said the following about the issue, which I agree with.
Personally, I think the risk of loss due to your employer going bankrupt is pretty low. While I'm sure it's happened, I've never heard of it happening. It certainly isn't common. I don't think I'd be willing to give up a $5-6K per year tax break because of that worry. I'm much more worried about market risk than 457 risk. So I'd go ahead and use the plan. But I'd be sure to max out my 401K and Backdoor Roth IRAs first. And I'd definitely spend that money first in retirement.
https://www.whitecoatinvestor.com/non-g ... qa-series/

If the tax break saves you 10% (just for the sake of discussion), then unless the risk of your employer going bankrupt before you withdraw the funds is at least 10%, then it makes sense to utilize the deferred comp plan, especially since the OP is maxing out everything else. And the OP says that the employer is solid, so I doubt that the risk of bankruptcy is anywhere near 10%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
edge
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Re: Deferred Comp Plan

Post by edge »

I only use it up to the match
PowderDay9
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Re: Deferred Comp Plan

Post by PowderDay9 »

willthrill81 wrote: Sun Nov 15, 2020 11:03 pm If the tax break saves you 10% (just for the sake of discussion), then unless the risk of your employer going bankrupt before you withdraw the funds is at least 10%, then it makes sense to utilize the deferred comp plan, especially since the OP is maxing out everything else. And the OP says that the employer is solid, so I doubt that the risk of bankruptcy is anywhere near 10%.
I agree with this line of thinking as pure expected values as long as the NQDC is a small portion of your total portfolio. Surely not many people would want to play a probability game where you choose a number from 1-10 and 9 of the numbers increase your portfolio by 10% but one of the numbers removes your entire portfolio.
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Re: Deferred Comp Plan

Post by 2tall4economy »

It was offered at one of my three former employers. I took it becaus it was the only way to get the 401k match that you’d otherwise miss out on because your compensation would hit the irs cap.

For the reasons other mentioned, I only contributed the minimum to get the match.

I quit three later and got a check for mid five digits. Was a non issue other than getting free money.
You can do anything you want in life. The rub is that there are consequences.
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willthrill81
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Re: Deferred Comp Plan

Post by willthrill81 »

PowderDay9 wrote: Sun Nov 15, 2020 11:42 pm
willthrill81 wrote: Sun Nov 15, 2020 11:03 pm If the tax break saves you 10% (just for the sake of discussion), then unless the risk of your employer going bankrupt before you withdraw the funds is at least 10%, then it makes sense to utilize the deferred comp plan, especially since the OP is maxing out everything else. And the OP says that the employer is solid, so I doubt that the risk of bankruptcy is anywhere near 10%.
I agree with this line of thinking as pure expected values as long as the NQDC is a small portion of your total portfolio. Surely not many people would want to play a probability game where you choose a number from 1-10 and 9 of the numbers increase your portfolio by 10% but one of the numbers removes your entire portfolio.
Agreed.

And of course, those with governmental DC plans are likely at far less risk of loss.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
leftcoaster
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Re: Deferred Comp Plan

Post by leftcoaster »

willthrill81 wrote: Mon Nov 16, 2020 10:33 am
PowderDay9 wrote: Sun Nov 15, 2020 11:42 pm
willthrill81 wrote: Sun Nov 15, 2020 11:03 pm If the tax break saves you 10% (just for the sake of discussion), then unless the risk of your employer going bankrupt before you withdraw the funds is at least 10%, then it makes sense to utilize the deferred comp plan, especially since the OP is maxing out everything else. And the OP says that the employer is solid, so I doubt that the risk of bankruptcy is anywhere near 10%.
I agree with this line of thinking as pure expected values as long as the NQDC is a small portion of your total portfolio. Surely not many people would want to play a probability game where you choose a number from 1-10 and 9 of the numbers increase your portfolio by 10% but one of the numbers removes your entire portfolio.
Agreed.

And of course, those with governmental DC plans are likely at far less risk of loss.
A DCP with a draw down period is structurally similar to a deferred annuity. And, as with insurance companies, one has to consider the health of the business. It would be interesting to figure out which economic indicators - cash on hand? Free flow? - would be input to a DCP rating system. Something like Berkshire Hathaway would
Probably rank pretty high (A++ or whatever).

My state doesn’t backstop deferred annuities 100% so I had to take on that risk.
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krafty81
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Re: Deferred Comp Plan

Post by krafty81 »

willthrill81 wrote: Sun Nov 15, 2020 11:01 pm
krafty81 wrote: Sun Nov 15, 2020 6:33 pm Tax-deferred accounts can be used very tax efficiently to pay for significant medical expenses. Also, the OP might move to a lower taxed state in the future, which would likely favor tax-deferred contributions now.

The comment copied from previous post is probably most applicable to me. I have maxed out everything else, including backdoor and mega backdoor, and am not sure I will live in CA forever. If they offer matching (my company is solid) makes sense to go for it, even though I doubt my federal bracket will change much.
That comment was made by me. I'm glad that it was useful to you.

Will you have a pension in retirement or significant other non-portfolio income? If not, how will your federal tax bracket remain the same in retirement?
I have a military pension and a small pension from this company.
wfrobinette
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Re: Deferred Comp Plan

Post by wfrobinette »

krafty81 wrote: Thu Nov 12, 2020 10:39 pm My company is finally looking at starting a deferred comp plan. I would qualify for it. Looking for any thoughts on DC and how it works.
Do you get a match in the plan?

I used deferred comp before because I got a 50% on the first 10% and was severely limited to 4% 401k contributions. Invested in Vanguard funds. Downfall it was paid out when I left org so took a decent tax hit that year but still came out ahead(Got paid out after tax more than I put in).

I probably wouldn't do it again unless I was sure to retire from said company.
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willthrill81
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Re: Deferred Comp Plan

Post by willthrill81 »

krafty81 wrote: Tue Nov 17, 2020 12:52 pm
willthrill81 wrote: Sun Nov 15, 2020 11:01 pm
krafty81 wrote: Sun Nov 15, 2020 6:33 pm Tax-deferred accounts can be used very tax efficiently to pay for significant medical expenses. Also, the OP might move to a lower taxed state in the future, which would likely favor tax-deferred contributions now.

The comment copied from previous post is probably most applicable to me. I have maxed out everything else, including backdoor and mega backdoor, and am not sure I will live in CA forever. If they offer matching (my company is solid) makes sense to go for it, even though I doubt my federal bracket will change much.
That comment was made by me. I'm glad that it was useful to you.

Will you have a pension in retirement or significant other non-portfolio income? If not, how will your federal tax bracket remain the same in retirement?
I have a military pension and a small pension from this company.
Okay, that makes more sense.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
ExPatKiwi
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Re: Deferred Comp Plan

Post by ExPatKiwi »

For those of you that work for companies that still offer a defined benefit pension plan and a non government 457(B) plan carefully check the fine print. Where I work contributions to the 457(b) "defer compensation" and the deferred compensation is therefore not factored into the final defined benefit pension plan payout calculation! By contributing to a 457(b) you can short change your pension payout unless you are earning more than $285,000 (2020) IRS maximum compensation limit allowed to be taken into account for retirement plans.
Counting down to retirement on December 31st, 2024
Gadget
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Re: Deferred Comp Plan

Post by Gadget »

I see a lot of people talking about the risk of losing deferred comp plan money if the company goes bankrupt. There is probably low odds of that, even though that's enough to deter most people who aren't close to retirement.

Another risk is a merger/acquisition. Possibly even a company split forced by the government, but I'm not positive on that one. But I do know of companies that had mergers/acquisitions and everyone with a deferred comp plan was forced to distribute the entire amount as a tax bomb in one year while they were still in their peak earning years.
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