My company recently began to offer executives a non-qualified deferred compensation plan with Fidelity and good underlying boglehead-type funds. Participants can choose to defer up to 100% of their annual cash bonus (for reference, cash bonuses are 100%+ of base salary and consistent). Due to the company’s fiscal year-end timing, elections must be made 18 months in advance of the bonus payout dates. In addition to the % deferred, participants must choose lump sum or installments (max 10 years), and when the distributions start (lots of options, but let’s assume just one, “later of specified date or separation”). Also, participants can give notice 12 months in advance of the originally specified distribution date to push it out (must be 5 years or greater). Emergency distributions are permitted based on IRS 409A.
I hope to be a lifer at the Company and it is investment grade rated, so no concern with the unsecured credit risk. I am 37 and expect to work another 15-20 years. My job appears to be stable and I suspect my annual comp could double over the next 5 years. My current setup is to defer ~20% to later of separation or 1/15/2031, but I’ll likely use the kickout feature. I am married with no kids, have 1 year of emergency funds saved, max out 401ks / HSA each year (using salary only), and net worth split 25% taxable accounts, 5% emergency, 5% non-qualified DCP, 20% qualified investment accounts, and 45% equity in home. We can live on my salary without bonus and have no major future expenses planned. We are in a high-tax state and are in the highest federal marginal tax bracket.
Before commenting on us having most of our net worth in home equity, know that we recently became first-time homeowners. Home equity will be 20-30% of net worth in 2 years at current trajectory.
Here are my questions:
- What percent of the bonus would you defer and how would you structure payout?
- What risks / opportunities come along with your recommended strategy?
- Has anyone been successful in getting a private loan backed by a DCP balance (note this is not an embedded feature of the plan, so it would be 3rd party)? The reason for this question is that I considered a ~50% deferral to continue to build my taxable account, but after cutting many large tax checks, I wonder if I should just defer 100% every year. This gets the benefit of tax-deferred growth, but comes with the risk of having those investments inaccessible if needed (hence the loan question).