Deferred Compensation and Life Annuity

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Deferred Compensation and Life Annuity

Post by top_spin » Mon Nov 13, 2017 2:11 pm

I have an employer that offers a 35k pretax deferred compensation.

However, it is asking that in the event of me leaving the company - it needs to give me the deferred compensation in terms of:

lump sum
monthly payments in a span of however many months I wanted
life annuity

Considering that I am still going to earn a significant amount of money - if I left the company - I really don't wanna take it(it would lose all its initial tax advantages).

Question really is, what would be the most intelligent thing to do here?

Objective: I don't need this money - I just want it to grow in the most tax-advantaged position.

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Re: Deferred Compensation and Life Annuity

Post by nedsaid » Fri Nov 24, 2017 2:22 pm

Is this money that you contribute? Is this money that the employer contributes?

If the employer is willing to put $35,000 a year into a deferred account for you, it seems that your options upon leaving the company is a secondary consideration. If in fact they are doing this, this would be a big incentive for you to stay with the company long term.

Not enough details to give advice. Let's see if someone else will weigh in.
A fool and his money are good for business.

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Re: Deferred Compensation and Life Annuity

Post by vasu100 » Fri Nov 24, 2017 3:00 pm

Since this is "Deferred Compensation", I assume it is money from your current comp which is "deferred" to the future (i.e. you contribute, not the employer). So the primary benefit is shifting the taxes to some point in the future. If you leave the company, the value could be diluted since you will be hit with a bigger tax bill when you leave.

My employer offers a similar plan. In my case, I am 59.5. My plan is to defer 50% of my income for the next 5 years, retire at 65, then take the deferred comp distributions over the next 5 years (and delay social security until 70). I am hoping this gives me max tax benefit. Effectively I would spread out my income over 10 years and hopefully get some tax advantages.

One fly in this ointment: my companies deferred-comp plan manager tells me that if the new tax bill passes, then the value of deferred comp plans goes away. I am not sure of specifics or why the value goes away, but because of this my company has delayed the deadline for when we can choose to participate in deferred compensation for 2018 (previous deadline was Nov-24, now Dec-15). So you may want to check with your company to see if they give you a few more weeks to see if the new task bill passes, and then decide after that.

Also check if your company has enabled a Roth backdoor for you in addition to deferred comp plan. My company enables up to 27K Roth backdoor (this is on top of the max 401K limit). This has the benefit of tax-free growth (plus no RMD from Roth IRA !!). Also just to be clear: check if you get three choices (401K, Roth 401K, After-tax Roth IRA). The first 2 are together capped at the 18.5K max contribution limit for 2018 (plus catchup contributions of 6K). The third one is the "backdoor", which my employer limits to 27K (not sure if this is also an IRS limit). I just enabled the Roth backdoor (this week !) - 27K of xmas bonus will go into the Roth backdoor. Also apparently the Roth backdoor is not impacted by the new tax bill (as always, check this out for yourself but that is my understanding, so I plan to enable the Roth backdoor for 2018 as well).

To repeat, since I just went thru this and want to share my experience: if you have not already enabled the Roth backdoor AND if you are expecting a bonus in December AND your company enables a 27K Roth backdoor on top of max 401K contributions AND you want to lower your 2017 taxes by deferring a chunk of your bonus into a Roth : HURRY, you need to act quickly !! If you just want to do this for 2018, relax and enjoy your Thanksgiving weekend since you have plenty of time and no need to rush.

My current plan is to put the max 27K into the Roth backdoor for 2017 (on top of the max contributions into the regular 401K), do the same for 2018, and wait for a couple of weeks to watch what happens in the tax bill before finalizing my decision on Deferred Comp plan contributions for 2018.

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Re: Deferred Compensation and Life Annuity

Post by chevca » Fri Nov 24, 2017 3:34 pm

I think the best or most intelligent option will only be known after you leave the company.

If you're there a year, a lump sum might be best. If you're there 20 year, the annuity might be best. I'd say split the difference and pick the monthly payments of a term you choose to be safe. Seems that would give you the most control no matter how long you stay there. IMO

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