Nonqualified Deferred Compensation (NQDC) Decision

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Topic Author
pickles27
Posts: 19
Joined: Wed Apr 20, 2016 3:24 pm

Nonqualified Deferred Compensation (NQDC) Decision

Post by pickles27 »

Good Evening!

I just received my open enrollment information from work and included was a memo alerting me that I am now a "Highly Compensated Employee". With this I have been informed that my 401k contributions will now be capped at 4%, but now have the option to participate in a NQDC. I have a few questions regarding this after reading the pamphlet and am seeking advice.

Prior to this, our household was maxing out my 401k and also maxing out both mine and my wife's Roth IRA (we still are below income limits for these). Now that this 4% cap will not come close to the 401k limit of $19.5k I am wondering where I should direct my remaining allocated investing funds?

Should I contribute to the NQDC? Should I go taxable?

I am 30 years old and have been working for my company (Top 10 privately held) for 7.5years. We are in the 22% tax bracket and live in no income tax state.

NQDC Info:
- Company Match of 60% up to first 2%
- Managed my Principal
- 100% vested
- Payments can be issued in lump sum or installments (monthly, quarterly, yearly) between 2-20 years

Looking for any advice as I had no idea individuals could be capped on top of the widely known $19.5k limit. Happy to add more clarity or answer follow up questions.

Thank you all,

Pickles27
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David Jay
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Location: Michigan

Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by David Jay »

That's a nice match, but how are the assets managed? Can you select the funds? Do you have fund information available?

If the only choice is some kind of annuity, I would invest in Taxable.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
pickles27
Posts: 19
Joined: Wed Apr 20, 2016 3:24 pm

Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by pickles27 »

David Jay wrote: Wed Oct 13, 2021 7:50 pm That's a nice match, but how are the assets managed? Can you select the funds? Do you have fund information available?

If the only choice is some kind of annuity, I would invest in Taxable.
I cannot see the fund selection yet until open enrollment, but in the pamphlet it states “wide range” of funds available and I have the freedom to choose and change throughout the year if desired.
vsquid
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Joined: Sat May 18, 2019 2:24 pm

Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by vsquid »

It sounds like maxing 401k, (Roth) IRA, and nqdc up to the employer match is a no brained. Choosing between nqdc after match and taxable is a more complex question.

Can your wife contribute more to her 401k (or does she have one)? Maxing that and using your salary for living expenses might make sense as well.
123
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Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by 123 »

If you contribute to the NQDC up to the match that seems okay, assuming you've got confidence in the employer's financial future (you're just a general creditor if the company goes south when it comes to money in most deferred compensation plans). If you've got discipline I would suggest just putting the excess in taxable accounts (equities preferred). A problem with nqdc plans is that, with respect to stock/equity investments, is that money you take out of the plan is just taxed as ordinary income, so the tax rate you pay on stock growth is a lot higher than if you had held the investments in a taxable account and taken advantage of long-term capital gains tax provisions.
The closest helping hand is at the end of your own arm.
DoubleComma
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Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by DoubleComma »

pickles27 wrote: Wed Oct 13, 2021 8:10 pm
David Jay wrote: Wed Oct 13, 2021 7:50 pm That's a nice match, but how are the assets managed? Can you select the funds? Do you have fund information available?

If the only choice is some kind of annuity, I would invest in Taxable.
I cannot see the fund selection yet until open enrollment, but in the pamphlet it states “wide range” of funds available and I have the freedom to choose and change throughout the year if desired.
Do some reading on NQDC plans. There are some critical things to know, like it’s not your money anymore unlike a 401k, rather you’re making a loan back to your company. So your company goes BK and you are just another creditor…kiss that money good by.

Also there is no funds to actually purchase, they will present it that way and use those funds as a tracking mechanism as to how much they owe you when it comes time to start withdrawals. The money is very likely just retained by the company and used as operating capital.

Last, and this is important to know, what happens if you leave or terminated from the company. Every plan is unique, mine is any balance <$100k is paid immediately and in lump sum, balances >$100k they pay based on your initial distribution instructions made when you set up the plan. There is no other way to get the money back out.

NQDC plans are are powerful tools, but you really need to know the absolute specifics of you plan…read the actual plan documents and don’t just let someone else tell you.

In your case, based on what you posted, I don’t think I would take advantage of this.

Now personally I do use a NQDP. However my company is 100+ years old, public and financially very healthy and stable. Also I still max my 401k, my wife’s 403b and save significantly in a taxable account and 529 in addition to the NQDP. The NQDP is fantastic way to manage my AGI and provide access to tax differed money between 55-65 without tapping SSI or my other retirement accounts … which is how I have my distribution plan set up.
Topic Author
pickles27
Posts: 19
Joined: Wed Apr 20, 2016 3:24 pm

Re: Nonqualified Deferred Compensation (NQDC) Decision

Post by pickles27 »

vsquid wrote: Wed Oct 13, 2021 10:41 pm It sounds like maxing 401k, (Roth) IRA, and nqdc up to the employer match is a no brained. Choosing between nqdc after match and taxable is a more complex question.

Can your wife contribute more to her 401k (or does she have one)? Maxing that and using your salary for living expenses might make sense as well.
My wife is a stay at home mother to our child so unfortunately no 401k, only Roth for her. Got some more info from HR today and my fund choices are identical to the 401k plan. This includes a large amount of choices including the indexes my 401k invests in (VINIX + VBTIX).
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