Deferred Compensation Plan Strategy

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Deferred Compensation Plan Strategy

Post by Coastcat »

First-time poster but really enjoy this forum. Below is a situation I’d like the group’s thoughts on:

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).
Last edited by Coastcat on Fri Apr 14, 2023 3:42 pm, edited 1 time in total.
focoyolo
Posts: 14
Joined: Sat Feb 19, 2022 2:54 pm

Re: Deferred Compensation Plan Strategy

Post by focoyolo »

There are many factors to consider as you try to predict the pros/cons of deferring your compensation for 10-20 years. I'm assuming the only benefit to deferring your bonus is to optimize your tax situation.

Considerations:
1. What is your current marginal tax bracket? What do you expect your marginal tax bracket when realizing the deferred income?
2. If you are laid off (or you quit) before full retirement age, are all the deferred funds released at once? If so, that could put you in a very high tax bracket for one year.
3. Why aren't you concerned about the unsecured credit risk? There have been lots of seemingly stable companies that have gone bankrupt over 10-20 year periods.
4. If you defer payments to age 63 or beyond, you need to consider the impact of deferred income on IRMAA.
5. If you retire early or find yourself unemployed and needing to purchase medical insurance, the deferred income may impact your ACA Premium Tax Credits.

I waited to defer income until I was closer to retirement, due to factors #2 and #3 above. Now that I'm retired and receiving the deferred income, I'm seeing some negative impacts due to factors #4 and #5.
dcabler
Posts: 4544
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Deferred Compensation Plan Strategy

Post by dcabler »

Been there, done that, wish I hadn't.

I had planned to be a lifer at the company I was at which offered it and for which I participated. Felt it was a good deal since I had already been there 22 years. They had other plans however. And given that these things don't generally come with a lot of warning, there was no way for me to change the payout method/date, so it started in January after termination.

Net result is that I had 10 years of payouts simultaneously with me continuing to work elsewhere. Last payout was last year and I'm retiring this year. Pretty sure it was a net-negative for me in the end.

Cheers
diy60
Posts: 972
Joined: Wed Sep 07, 2016 6:54 pm

Re: Deferred Compensation Plan Strategy

Post by diy60 »

I would never consider anything longer than 5 years from retirement. A co-worker was laid off, which triggered the payout, and then was rehired by same company inside of 60 days but in a different position. No way to stop the payout, in his case I'm sure it was a net negative. Good luck.
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

Bad idea to push it

Nobody guarantees u can get a loan from that in the future. Those kinds of loans come and go.

It’s tax deferred growth and not tax free. It’s all income rates too.

As mentioned best if older and near retirement to push it.

You could easily defer to the same or higher taxes if too aggressive. That’s not even considering the risks.

Build your taxable such that you don’t have a loan concern.
knowledge
Posts: 489
Joined: Wed Mar 02, 2011 4:44 pm

Re: Deferred Compensation Plan Strategy

Post by knowledge »

I agree with prior posters. You are too far out from retirement to with so many factors that could ruin such a specific plan. Hell, even if I was 5 years out, I'm not sure I could convince myself to do it.
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Deferred Compensation Plan Strategy

Post by TomatoTomahto »

We always declined to participate EXCEPT a recent plan would match up to some low-ish amount (something like $10k). I don’t know why they did that, presumably to get more participation, perhaps to meet some discriminatory test. In any case, we participated and of course, Murphy’s Rule, we get the payout at the worst possible time (marginal tax rate 50%) but the match makes up for it.
I get the FI part but not the RE part of FIRE.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

focoyolo wrote: Fri Apr 14, 2023 1:16 pm Considerations:
1. What is your current marginal tax bracket? What do you expect your marginal tax bracket when realizing the deferred income?
2. If you are laid off (or you quit) before full retirement age, are all the deferred funds released at once? If so, that could put you in a very high tax bracket for one year.
3. Why aren't you concerned about the unsecured credit risk? There have been lots of seemingly stable companies that have gone bankrupt over 10-20 year periods.
4. If you defer payments to age 63 or beyond, you need to consider the impact of deferred income on IRMAA.
5. If you retire early or find yourself unemployed and needing to purchase medical insurance, the deferred income may impact your ACA Premium Tax Credits.

I waited to defer income until I was closer to retirement, due to factors #2 and #3 above. Now that I'm retired and receiving the deferred income, I'm seeing some negative impacts due to factors #4 and #5.
Thanks for the response. #1. I'm deep in the highest marginal bracket and have no illusion that my future bracket will be lower. After reading other posts on this topic, it seems like being taxed on the balance as income (and avoiding the capital gains over a long time horizon) could be the primary advantage. #2. We can specify later of separation or a specified date so there is not a surprise lump sum issue. #3 We are a very conservative mega-cap (private) company and I have a hand in managing corporate finance, so it would be my own fault really. #4/5 Great points, thanks.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

dcabler wrote: Fri Apr 14, 2023 1:28 pm Been there, done that, wish I hadn't.

I had planned to be a lifer at the company I was at which offered it and for which I participated. Felt it was a good deal since I had already been there 22 years. They had other plans however. And given that these things don't generally come with a lot of warning, there was no way for me to change the payout method/date, so it started in January after termination.

Net result is that I had 10 years of payouts simultaneously with me continuing to work elsewhere. Last payout was last year and I'm retiring this year. Pretty sure it was a net-negative for me in the end.

Cheers
Thanks. This is a possibility to consider for sure, but could be avoided if I kick out the specified distro date to when I believe I'll be in a position to retire.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

knowledge wrote: Fri Apr 14, 2023 2:48 pm I agree with prior posters. You are too far out from retirement to with so many factors that could ruin such a specific plan. Hell, even if I was 5 years out, I'm not sure I could convince myself to do it.
Thank you. I may just keep the balance capped to some small amount of total net worth and keep stroking checks to uncle Sam...
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

You’re going to do that any way. It’s deferral not tax free.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

Rex66 wrote: Fri Apr 14, 2023 3:41 pm You’re going to do that any way. It’s deferral not tax free.
I edited the post to say tax-deferred growth. My understanding is that the distro is taxed at income rates so you avoid some capital gains. Another post had this math:

Take $100k of income (after Medicare taxes paid).
Assume current marginal tax rate of 35%.

In taxable this is $65k after income taxes are paid. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $130k. Then you sell. Assume capital gains tax of 18.8% on the $65k LTCG. You'll pay $12.2k in taxes which leaves you with $117.8k

In NQDC you have $100k to start. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $200k. Then you withdraw the funds. Hopefully you're in a lower marginal tax bracket but let's just assume 35%. You'll pay $70k in taxes which leaves you with $130k.
toocold
Posts: 207
Joined: Sun Jul 23, 2017 9:17 am

Re: Deferred Compensation Plan Strategy

Post by toocold »

I used a NCDC to bridge payments for early retirement. I saved a 100% of my salary and bonuses for several years (and lived on passive income) and structured it in such a way that it will pay me 1/15 every year between late 40s and early 60s.

Pros: Bridge (Annual "Paycheck"), lower taxes, no FICA deductions
Cons: Company bankruptcy risk, double paycheck if I go back to work, can't put payments into IRA, can't manage annual income for ACA due to base payment

I'm on year 4 and so far so good. Payment has been higher due to run-up on stock market
toocold
Posts: 207
Joined: Sun Jul 23, 2017 9:17 am

Re: Deferred Compensation Plan Strategy

Post by toocold »

I used a NCDC to bridge payments for early retirement. I saved a 100% of my salary and bonuses for several years (and lived on passive income) and structured it in such a way that it pays me 1/15 every year between late 40s and early 60s.

Pros: Bridge (Annual "Paycheck"), lower taxes, no FICA deductions
Cons: Company bankruptcy risk, double paycheck if I go back to work, can't put payments into IRA, can't manage annual income for ACA due to base payment

I'm on year 4 and so far so good. Payment has been higher due to run-up on stock market
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

If you are actually in a low then you pay zero capital gains taxes

It’s not realistic unless retiring early to assume low tax rate. Yes you fill the lower buckets first but in retirement you probably want to spend your other deferred accounts unless you want to live less large and leave a tax question to heirs bc taxes come out eventually.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

Rex66 wrote: Fri Apr 14, 2023 3:51 pm If you are actually in a low then you pay zero capital gains taxes

It’s not realistic unless retiring early to assume low tax rate. Yes you fill the lower buckets first but in retirement you probably want to spend your other deferred accounts unless you want to live less large and leave a tax question to heirs bc taxes come out eventually.
Think you may be misinterpreting something I wrote... in no situation do I think I'll be in a low tax rate (now or later).
PowderDay9
Posts: 1001
Joined: Fri Oct 12, 2018 12:29 pm

Re: Deferred Compensation Plan Strategy

Post by PowderDay9 »

Coastcat wrote: Fri Apr 14, 2023 3:44 pm
Rex66 wrote: Fri Apr 14, 2023 3:41 pm You’re going to do that any way. It’s deferral not tax free.
I edited the post to say tax-deferred growth. My understanding is that the distro is taxed at income rates so you avoid some capital gains. Another post had this math:

Take $100k of income (after Medicare taxes paid).
Assume current marginal tax rate of 35%.

In taxable this is $65k after income taxes are paid. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $130k. Then you sell. Assume capital gains tax of 18.8% on the $65k LTCG. You'll pay $12.2k in taxes which leaves you with $117.8k

In NQDC you have $100k to start. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $200k. Then you withdraw the funds. Hopefully you're in a lower marginal tax bracket but let's just assume 35%. You'll pay $70k in taxes which leaves you with $130k.
Sounds like something I would say. :D

The NQDC plans are most useful if you're planning to retire early. Then you can defer from a high bracket to something lower. In your case, it sounds like you're going to be in a high or highest bracket forever either because you work long enough or you save so much that you're withdrawing several hundred thousand a year from various accounts in retirement.

You'll still have the savings from annual capital gains taxes but your biggest risk is if tax brackets increase in the future. It wouldn't surprise me if the top bracket increases, but it's anyone's guess. One thing to keep in mind is you're deferring from the top bracket and in retirement some withdrawals will be used to fill up the lower brackets each year.

There's not a ton of info out there on NQDC plans, presumably because not many people have access to them. The White Coat Investor has discussed NQDC plans on his podcast and it was recommended not to have more than 20% of your net worth in these plans. He also said he's never heard of anyone not getting their money due to a backrupcy situation and said to email him if they know anyone.

Your plan has the interesting "later than clause". The benefit is you can potentially avoid a huge pay out on an earlier than planned speration. On the flip side you take more years of backrupcy risk.

I'm not sure when you are planning to retire but I like your strategy of picking a date 8+ years into the future. I'd do the max 10 years distribution to hopefully maximize your tax savings. Probably need more info to make the best strategy though.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

PowderDay9 wrote: Fri Apr 14, 2023 5:45 pm
Sounds like something I would say. :D

The NQDC plans are most useful if you're planning to retire early. Then you can defer from a high bracket to something lower. In your case, it sounds like you're going to be in a high or highest bracket forever either because you work long enough or you save so much that you're withdrawing several hundred thousand a year from various accounts in retirement.

You'll still have the savings from annual capital gains taxes but your biggest risk is if tax brackets increase in the future. It wouldn't surprise me if the top bracket increases, but it's anyone's guess. One thing to keep in mind is you're deferring from the top bracket and in retirement some withdrawals will be used to fill up the lower brackets each year.

There's not a ton of info out there on NQDC plans, presumably because not many people have access to them. The White Coat Investor has discussed NQDC plans on his podcast and it was recommended not to have more than 20% of your net worth in these plans. He also said he's never heard of anyone not getting their money due to a backrupcy situation and said to email him if they know anyone.

Your plan has the interesting "later than clause". The benefit is you can potentially avoid a huge pay out on an earlier than planned speration. On the flip side you take more years of backrupcy risk.

I'm not sure when you are planning to retire but I like your strategy of picking a date 8+ years into the future. I'd do the max 10 years distribution to hopefully maximize your tax savings. Probably need more info to make the best strategy though.
Thanks. Maybe in 8 years (with the option to kick further) I'll have a better sense of if I want to retire early and use this to bridge the gap. The risk of bankruptcy for my company is extremely low for a variety of reasons.
123
Posts: 10415
Joined: Fri Oct 12, 2012 3:55 pm

Re: Deferred Compensation Plan Strategy

Post by 123 »

Deferred compensation can end up being a tax bomb as some have reported. If you elect to hold your deferred compensation in stocks you lose long term capital gains tax treatment on any gains since they will be taxed as ordinary income when they are distributed.

Deferred compensation can be a good tool to enforce savings and investment but it can come at a high tax cost.

If not used wisely deferred compensation plans can significantly increase the actual taxes that you pay. And "Stuff Happens" to even those that plan well.
The closest helping hand is at the end of your own arm.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

toocold wrote: Fri Apr 14, 2023 3:50 pm I used a NCDC to bridge payments for early retirement. I saved a 100% of my salary and bonuses for several years (and lived on passive income) and structured it in such a way that it pays me 1/15 every year between late 40s and early 60s.

Pros: Bridge (Annual "Paycheck"), lower taxes, no FICA deductions
Cons: Company bankruptcy risk, double paycheck if I go back to work, can't put payments into IRA, can't manage annual income for ACA due to base payment

I'm on year 4 and so far so good. Payment has been higher due to run-up on stock market
Cool to hear this worked for you!
1060WAddison
Posts: 36
Joined: Sat Aug 13, 2022 8:05 pm

Re: Deferred Compensation Plan Strategy

Post by 1060WAddison »

I had good luck with my company's deferred comp plan.

I was a lifer at Megacorp, retired at 50 (4 years ago) with 25 years of service. Was already maxing out 401(k), backdoor Roth, HSA, etc. Started deferring a portion of my annual bonus at age 33 with distributions tied to line up with college tuition payments for my kids. That turned out to be a bad call, as I wound up having more than I needed in 529 plans. Those distributions (which were relatively small in the overall scheme of things) came while I was still working and didn't need the money. Not a disaster, as the tax I paid on the distributions wasn't much different than what I would have paid on the original comp had I not deferred it.

Around the time I turned 40, I switched the distributions on new deferrals to "over five years starting upon retirement." And as I got closer to 50 (knowing I was going to retire at 50), I upped the deferral to 100% of bonus and eventually a portion of salary on top. Then, before I retired, I elected to push the distributions on previous deferrals out another 5 years, to pay out over five years from age 55 to age 60 (starting 5 years after retirement). This was a good fit for me, because in the first few years of retirement, I still had meaningful W-2 income as I had RSUs vesting during that time and my tax rate remained relatively high. Now I'll have two years of pretty low taxable income (after RSUs vested, before DCP distributions start) to possibly do some Roth conversions. Then from 2025 to 2029, I'll have meaningful (for me, at least) taxable DCP distributions.

One other factor to consider: I have retiree medical through my former employer, so I'm not sensitive to IRMAA considerations.

My bottom line is that if the strategy works out, it can be pretty tax efficient. If I had died or been fired before I retired, the entire balance (about $1.5 million) would have been paid out all at once and would have been a significant tax drag. It's worked out the way I planned it (fortunately) and I have some limited back-testing that shows I'm significantly better off in income tax terms versus not using the DCP (even considering the difference between ordinary and LTCG tax rates - and note that LTCG are subject to NIIT at 3.8% while DCP distributions are not).
Gadget
Posts: 1026
Joined: Fri Mar 17, 2017 1:38 pm

Re: Deferred Compensation Plan Strategy

Post by Gadget »

Just to add another risk of these plans: company mergers. We never participated in these plans directly, but we did get some automatic payments in one for a while while the company tried for some reason to convince everyone they were awesome. I think a lot of people participated. Later on, the company merged with another company. No one thought much of it other than some minimal layoffs until they all found out that the merger triggered immediate and full payment for all money in the NQDC plans. It was quite a tax bomb for many, and everyone who participated seems to regret it.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

1060WAddison wrote: Fri Apr 14, 2023 6:38 pm I had good luck with my company's deferred comp plan.

I was a lifer at Megacorp, retired at 50 (4 years ago) with 25 years of service. Was already maxing out 401(k), backdoor Roth, HSA, etc. Started deferring a portion of my annual bonus at age 33 with distributions tied to line up with college tuition payments for my kids. That turned out to be a bad call, as I wound up having more than I needed in 529 plans. Those distributions (which were relatively small in the overall scheme of things) came while I was still working and didn't need the money. Not a disaster, as the tax I paid on the distributions wasn't much different than what I would have paid on the original comp had I not deferred it.

Around the time I turned 40, I switched the distributions on new deferrals to "over five years starting upon retirement." And as I got closer to 50 (knowing I was going to retire at 50), I upped the deferral to 100% of bonus and eventually a portion of salary on top. Then, before I retired, I elected to push the distributions on previous deferrals out another 5 years, to pay out over five years from age 55 to age 60 (starting 5 years after retirement). This was a good fit for me, because in the first few years of retirement, I still had meaningful W-2 income as I had RSUs vesting during that time and my tax rate remained relatively high. Now I'll have two years of pretty low taxable income (after RSUs vested, before DCP distributions start) to possibly do some Roth conversions. Then from 2025 to 2029, I'll have meaningful (for me, at least) taxable DCP distributions.

One other factor to consider: I have retiree medical through my former employer, so I'm not sensitive to IRMAA considerations.

My bottom line is that if the strategy works out, it can be pretty tax efficient. If I had died or been fired before I retired, the entire balance (about $1.5 million) would have been paid out all at once and would have been a significant tax drag. It's worked out the way I planned it (fortunately) and I have some limited back-testing that shows I'm significantly better off in income tax terms versus not using the DCP (even considering the difference between ordinary and LTCG tax rates - and note that LTCG are subject to NIIT at 3.8% while DCP distributions are not).
This was helpful, thank you. This appears to be a good strategy if you can make it work.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

Gadget wrote: Fri Apr 14, 2023 6:46 pm Just to add another risk of these plans: company mergers. We never participated in these plans directly, but we did get some automatic payments in one for a while while the company tried for some reason to convince everyone they were awesome. I think a lot of people participated. Later on, the company merged with another company. No one thought much of it other than some minimal layoffs until they all found out that the merger triggered immediate and full payment for all money in the NQDC plans. It was quite a tax bomb for many, and everyone who participated seems to regret it.
Ouch. Luckily our company won’t be merging but good to keep in mind.
Zipster
Posts: 100
Joined: Sun Jan 02, 2022 4:49 pm
Location: The beautiful midwest!

Re: Deferred Compensation Plan Strategy

Post by Zipster »

Coastcat wrote: Fri Apr 14, 2023 8:53 pm Luckily our company won’t be merging but good to keep in mind.
Having worked at megacorps for years, I’m not sure how you can know that. I’m also not sure how “change in control” is defined, but it is broader than mergers and acquisitions, and can trigger immediate payout (count me in as one who was in this situation). I had a huge tax hit on that one, but there was a company match if you chose company stock as your deferral (I would not recommend this… but that’s what I did at the time), so I probably came out ahead.

If you don’t think you’ll be in a lower tax bracket when your deferred compensation is paid out, I’m not sure why you’d want to do this.
User avatar
riverant
Posts: 1073
Joined: Tue May 04, 2021 6:51 am

Re: Deferred Compensation Plan Strategy

Post by riverant »

Very similar situation as you and similar plan. My plan is required to maximize the company match for high earners. As such, I’m deferring the minimum in order to maximize the match, and only deferring for the minimum 5 years.
Firemenot
Posts: 1497
Joined: Wed Apr 01, 2020 8:48 pm

Re: Deferred Compensation Plan Strategy

Post by Firemenot »

A key factor is the stability of your company. You don’t want to contribute if there’s any real risk of bankruptcy. You’ll just be a creditor in the event of bankruptcy.

I’ve contributed to my company’s deferred comp plan for almost a decade now. I’ve always elected a distribution schedule of at least 10 years so that I could move to a no-income tax state in the future, should I choose, and be free and clear of my high tax state. Fortunately, most of my deferred comp is in a plan where if they terminate me, or I choose to leave, it doesn’t all come due at separation but rather still pays on the 10+ year distribution schedule. I have about 15% of my net worth in the deferred comp plan. If I early retire it’ll be my income bridge to 401k distributions / social security.

Assuming my tax rate isn’t higher during the distribution years, a mental cheat that I’ve used is that the taxes I would have paid keep appreciating. So in effect, I get the appreciation on the after-tax part for free. In that sense it’s sort of like a Roth. And, of course, my hope is that the tax rate will be lower when I receive distributions so it would be a two-fer.
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Deferred Compensation Plan Strategy

Post by TomatoTomahto »

Firemenot wrote: Fri Apr 14, 2023 9:52 pm . I’ve always elected a distribution schedule of at least 10 years so that I could move to a no-income tax state in the future, should I choose, and be free and clear of my high tax state.
Don't be too sure of that. Some states (eg, NY, CA) are pretty aggresssive in coming after income that was earned in their state and deferred.
I get the FI part but not the RE part of FIRE.
Firemenot
Posts: 1497
Joined: Wed Apr 01, 2020 8:48 pm

Re: Deferred Compensation Plan Strategy

Post by Firemenot »

TomatoTomahto wrote: Sat Apr 15, 2023 5:37 am
Firemenot wrote: Fri Apr 14, 2023 9:52 pm . I’ve always elected a distribution schedule of at least 10 years so that I could move to a no-income tax state in the future, should I choose, and be free and clear of my high tax state.
Don't be too sure of that. Some states (eg, NY, CA) are pretty aggresssive in coming after income that was earned in their state and deferred.
Fair point. But even if I never move it’s still worth it to me as likely my tax rate on withdrawal will be lower, and I didn’t spend it regardless on consumption.
willyd123
Posts: 398
Joined: Mon Feb 19, 2018 6:23 am

Re: Deferred Compensation Plan Strategy

Post by willyd123 »

I will just respond to your question on risks. I deferred compensation into two different company NQDC plans so I have some experience in the area.

Default Risk - Everyone always tries to brush away this risk but I can tell you the first company that I deferred with was one day a AA rated organization and then in 2008 it was on the brink. After many sleepless nights I was able to get my money out but do NOT underestimate this risk. Historically, people almost always get their money out of these programs when a company goes bankrupt but just be aware this things can change very quickly.

Next Job Risk - You are 37 and think you might be with the company for the long haul. I seriously doubt it. And here's the issue, if you do move on, quess what, you will be getting paid from your new employer AND you will be getting deferred comp distributions from your old company which means you will be paying taxes on those distributions at the highest marginal rate. This also happened to me.

State Tax Risk -You mentioned that you are in a high tax state. You should check to see that if you move whether the state that you currently reside will come after the deferred compensation distributions after you move. My guess is they absolutely will. Again this happened to me.

I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
ModifiedDuration
Posts: 1408
Joined: Sat Dec 05, 2015 3:33 pm

Re: Deferred Compensation Plan Strategy

Post by ModifiedDuration »

If you take the deferred payments over a period of 10 years or more, then the payment is taxed in the state you reside in, not the state the income is earned. Virtually all of the executives in my megacorp were doing 10 year distributions for this reason.

Per Fidelity:

“You also may have the option of taking a special state tax benefit when payments are made over 10 years or more. Payments structured this way are taxed in the state of residence when paid, not in the state in which the income was earned. This is a tax benefit for those planning to move to a state with lower income tax rates.”

https://www.fidelity.com/viewpoints/ret ... qdc-part-3


Here is the actual Code. See (a), then (b) (1) (I):

https://www.law.cornell.edu/uscode/text/4/114
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Deferred Compensation Plan Strategy

Post by TomatoTomahto »

willyd123 wrote: Sat Apr 15, 2023 8:18 am
I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
We meet those two criteria, and yet even then, surprises show up. We were convinced that my wife's penultimate job would be her last and she was of retirement age. But, surprise, someone showed up with a job she just could not refuse.

So, we deferred at 45% combined marginal expecting to pay when realized at 40% but instead are now paying at 50%. Massachusetts surprised us with a 5% additional flat tax for high earners. Since we only participated up to the match amount we still come out ahead, and the numbers are small in any case, but it would have been a rude awakening if we had participated to a greater extent.

Over the years, I've seen enough colleagues get in trouble from being "cute" with taxes that I have come to the conclusion that just paying up is often the right policy; I dislike paying taxes as much as the next person, but it seems that some people are blinded by hatred for taxes. Man plans and God laughs.
I get the FI part but not the RE part of FIRE.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

willyd123 wrote: Sat Apr 15, 2023 8:18 am I will just respond to your question on risks. I deferred compensation into two different company NQDC plans so I have some experience in the area.

Default Risk - Everyone always tries to brush away this risk but I can tell you the first company that I deferred with was one day a AA rated organization and then in 2008 it was on the brink. After many sleepless nights I was able to get my money out but do NOT underestimate this risk. Historically, people almost always get their money out of these programs when a company goes bankrupt but just be aware this things can change very quickly.

Next Job Risk - You are 37 and think you might be with the company for the long haul. I seriously doubt it. And here's the issue, if you do move on, quess what, you will be getting paid from your new employer AND you will be getting deferred comp distributions from your old company which means you will be paying taxes on those distributions at the highest marginal rate. This also happened to me.

State Tax Risk -You mentioned that you are in a high tax state. You should check to see that if you move whether the state that you currently reside will come after the deferred compensation distributions after you move. My guess is they absolutely will. Again this happened to me.

I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
I hear you on all the risks. No one this forum will buy this because I’m not going to get into details about our unique company, but default risk is very low. I have a great reputation with CEO (who I also expect to be in place for a long time) which is why I suspect I’ll be able to stick it out; certainly there are scenarios that could end differently. One way I’m looking at it is that the money is getting taxed at the highest rate now, or the highest rate later (potentially even higher), but at least I’ll avoid the capital gains tax. Also, I don’t want to move out of state, so no chance for arbitrage there. Thanks for the response.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

TomatoTomahto wrote: Sat Apr 15, 2023 8:49 am
willyd123 wrote: Sat Apr 15, 2023 8:18 am
I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
We meet those two criteria, and yet even then, surprises show up. We were convinced that my wife's penultimate job would be her last and she was of retirement age. But, surprise, someone showed up with a job she just could not refuse.

So, we deferred at 45% combined marginal expecting to pay when realized at 40% but instead are now paying at 50%. Massachusetts surprised us with a 5% additional flat tax for high earners. Since we only participated up to the match amount we still come out ahead, and the numbers are small in any case, but it would have been a rude awakening if we had participated to a greater extent.

Over the years, I've seen enough colleagues get in trouble from being "cute" with taxes that I have come to the conclusion that just paying up is often the right policy; I dislike paying taxes as much as the next person, but it seems that some people are blinded by hatred for taxes. Man plans and God laughs.
This seems to be the general consensus: If you are close to retirement you can use this as a way to create a bridge but otherwise many of the risks outweigh the benefits. I think ultimately I may seed it with enough to grow to some decent payout (probably something like 10% of my bonus, maybe even every other year) and set the 10-year distribution date to when I’m 55 in case I decide to retire early.
Firemenot
Posts: 1497
Joined: Wed Apr 01, 2020 8:48 pm

Re: Deferred Compensation Plan Strategy

Post by Firemenot »

ModifiedDuration wrote: Sat Apr 15, 2023 8:35 am If you take the deferred payments over a period of 10 years or more, then the payment is taxed in the state you reside in, not the state the income is earned. Virtually all of the executives in my megacorp were doing 10 year distributions for this reason.
I’m
Per Fidelity:

“You also may have the option of taking a special state tax benefit when payments are made over 10 years or more. Payments structured this way are taxed in the state of residence when paid, not in the state in which the income was earned. This is a tax benefit for those planning to move to a state with lower income tax rates.”

https://www.fidelity.com/viewpoints/ret ... qdc-part-3


Here is the actual Code. See (a), then (b) (1) (I):

https://www.law.cornell.edu/uscode/text/4/114
Great point. I assumed the commenters had some form of experience with the 10 year safe harbor window somehow being “pierced” by an aggressive tax authority.

That was my experience too. Lots of executives did the 10 year distribution and left high tax state for Florida to avoid income tax on distributions. And in a state with a very aggressive tax authority (will even hire PIs to follow people around) for people that moved to Florida. And the plan material specifically marketed such benefits of doing distributions over at least 10 years. To my knowledge none have had issues.
Morford
Posts: 54
Joined: Tue Jun 20, 2017 8:42 am

Re: Deferred Compensation Plan Strategy

Post by Morford »

Coastcat wrote: Sat Apr 15, 2023 9:29 am
TomatoTomahto wrote: Sat Apr 15, 2023 8:49 am
willyd123 wrote: Sat Apr 15, 2023 8:18 am
I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
We meet those two criteria, and yet even then, surprises show up. We were convinced that my wife's penultimate job would be her last and she was of retirement age. But, surprise, someone showed up with a job she just could not refuse.

So, we deferred at 45% combined marginal expecting to pay when realized at 40% but instead are now paying at 50%. Massachusetts surprised us with a 5% additional flat tax for high earners. Since we only participated up to the match amount we still come out ahead, and the numbers are small in any case, but it would have been a rude awakening if we had participated to a greater extent.

Over the years, I've seen enough colleagues get in trouble from being "cute" with taxes that I have come to the conclusion that just paying up is often the right policy; I dislike paying taxes as much as the next person, but it seems that some people are blinded by hatred for taxes. Man plans and God laughs.
This seems to be the general consensus: If you are close to retirement you can use this as a way to create a bridge but otherwise many of the risks outweigh the benefits. I think ultimately I may seed it with enough to grow to some decent payout (probably something like 10% of my bonus, maybe even every other year) and set the 10-year distribution date to when I’m 55 in case I decide to retire early.
I’m similarly situated and have been participating in our NQDC plan for over 10 years. Our plan doesn’t allow investment - it accrued an annual interest rate that resets each year (with an attractive floor). The tax rate is generally irrelevant as will be in top bracket whether participate or not - I find it to be an attractive part of our overall strategy. Don’t let the tax tail wag the dog.
NotWhoYouThink
Posts: 3595
Joined: Fri Dec 26, 2014 3:19 pm

Re: Deferred Compensation Plan Strategy

Post by NotWhoYouThink »

You are considering the trading:

- Your current high marginal tax rate, plus the capital gains tax on growth, if and when you sell

against

- Ordinary income tax rates when you withdraw, on both the deferred amount and any growth.

So you'll trade capital gains rates for ordinary income tax rates, whatever they may be in the future. You know the tax rates are scheduled to rise when the TCJA cuts expire. How high, and how many times they rise between now and your retirement we don't know.

Or you could leave the company earlier than you now expect. It may seem unlikely, but surprises happen. If you end up taking this income when you are employed elsewhere, you will likely pay higher tax rates on it than you would pay over the next few years.

I deferred and wish I hadn't. Got hit with a tax bomb. But only because the investments had grown substantially, so it's hard to complain about paying big taxes on big incomes, but we do it on bogleheads a lot.

The non-qualified plans are treated as unsecured debts of the firm. I don't know anyone who would consider that collateral for a loan.
PowderDay9
Posts: 1001
Joined: Fri Oct 12, 2018 12:29 pm

Re: Deferred Compensation Plan Strategy

Post by PowderDay9 »

It's not ordinary income taxes vs capital gains. You pay ordinary income taxes in both scenarios. OP is deep in the 37% bracket. There is no tax bomb risk when you defer at 37% and get paid out at 37% (unless tax rates change). OP will take the unsecured creditor risk of their company and will save capital gains that would have been paid if the money had been in a taxable account. This is easy to see using the example above in this thread.
User avatar
sf_tech_saver
Posts: 448
Joined: Sat Sep 08, 2018 9:03 pm

Re: Deferred Compensation Plan Strategy

Post by sf_tech_saver »

I've used my mega-corps deferred comp plan over the years. I have about $600k in it, or about 10% of my portfolio. I'm 45.

Positive:

--Dead simple way to ensure a high savings rate! I think this is the #1 benefit, frankly. Lots of Bogleheads don't seem to advocate for them because they are paranoid about credit risk (fair), but savings rate simplicity is worth something to me too.

--My plan allows a "payout ten years after you leave" option. This then begins a 15-year pay-out plan. Since I'm 45, this is fine as I may be taking a step back in my career by then. Take a close look at these options in your plan.

--I live in California, where dividends are taxed like regular income, so its nice to let the income compound a little untaxed before I finally pay income tax on it.

--I COULD if I wanted to move to a lower tax state and live off the income (an optionality I don't have if I take the income now). Nevada is just next door...

Negatives:

--Beware, the software that powers these plans on Fidelity is clunky and infrequently used! My bonus defer vs. regular salary sometimes takes a year to synch! Be sure to carefully plan your payouts if it's on Fidelity as if you leave; it's a locked preference, not something you can adjust once you leave (why?). It feels like a lot of money to have in a pretty one-off plan interface.

--It does make planning out my expected future tax rate more complicated. I plan to take a 3% portfolio withdrawal approach if I ever quit working -- but now estimating my tax rate is more complex for sure.

Net, net:

I stopped doing it this year as I don't want it to be more than 10% of my portfolio, but I have no regrets about using it until now. It gives me a simple way to improve my savings rate and optionality if I want to move to a lower-tax state. I leverage a fidelity S&P 500 index for all the investments in my plan.

On loans, I keep a sizeable after-tax amount with Schwab, and they have a very slick pledged asset line interface. I highly recommend that for quick liquidity as needed. It might be worth building up enough after-tax portfolio at a firm like that first if you want that flexibility.
VTI is a modern marvel
momvesting
Posts: 514
Joined: Tue Apr 12, 2016 9:18 pm

Re: Deferred Compensation Plan Strategy

Post by momvesting »

A quick non-financial question: How long have you been with this company? I'm just trying to see if you are settled in and judging your desire to be a lifer as a level-headed choice or if you are in the honeymoon phase with your job. I think this distinction should factor in to your decision.
NotWhoYouThink
Posts: 3595
Joined: Fri Dec 26, 2014 3:19 pm

Re: Deferred Compensation Plan Strategy

Post by NotWhoYouThink »

PowderDay9 wrote: Sat Apr 15, 2023 11:54 am It's not ordinary income taxes vs capital gains. You pay ordinary income taxes in both scenarios. OP is deep in the 37% bracket. There is no tax bomb risk when you defer at 37% and get paid out at 37% (unless tax rates change). OP will take the unsecured creditor risk of their company and will save capital gains that would have been paid if the money had been in a taxable account. This is easy to see using the example above in this thread.
If his investments double between contributions and payouts, it's ordinary rates vs. capital gains rates on the GAINS. If his investments lose money it's all ordinary income, but without the ability to deduct the losses.
PowderDay9
Posts: 1001
Joined: Fri Oct 12, 2018 12:29 pm

Re: Deferred Compensation Plan Strategy

Post by PowderDay9 »

NotWhoYouThink wrote: Sat Apr 15, 2023 1:27 pm
PowderDay9 wrote: Sat Apr 15, 2023 11:54 am It's not ordinary income taxes vs capital gains. You pay ordinary income taxes in both scenarios. OP is deep in the 37% bracket. There is no tax bomb risk when you defer at 37% and get paid out at 37% (unless tax rates change). OP will take the unsecured creditor risk of their company and will save capital gains that would have been paid if the money had been in a taxable account. This is easy to see using the example above in this thread.
If his investments double between contributions and payouts, it's ordinary rates vs. capital gains rates on the GAINS. If his investments lose money it's all ordinary income, but without the ability to deduct the losses.
Here's the gains example. If you're investing in equities over a long period of time and it loses, we'll have bigger problems to worry about.


Take $100k of income (after Medicare taxes paid).
Assume current marginal tax rate of 35%.

In taxable this is $65k after income taxes are paid. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $130k. Then you sell. Assume capital gains tax of 18.8% on the $65k LTCG. You'll pay $12.2k in taxes which leaves you with $117.8k

In NQDC you have $100k to start. Put it all in equities and assume it doubles in 10 years. At the end of 10 years you have $200k. Then you withdraw the funds. Hopefully you're in a lower marginal tax bracket but let's just assume 35%. You'll pay $70k in taxes which leaves you with $130k.
willyd123
Posts: 398
Joined: Mon Feb 19, 2018 6:23 am

Re: Deferred Compensation Plan Strategy

Post by willyd123 »

Coastcat wrote: Sat Apr 15, 2023 9:24 am
willyd123 wrote: Sat Apr 15, 2023 8:18 am I will just respond to your question on risks. I deferred compensation into two different company NQDC plans so I have some experience in the area.

Default Risk - Everyone always tries to brush away this risk but I can tell you the first company that I deferred with was one day a AA rated organization and then in 2008 it was on the brink. After many sleepless nights I was able to get my money out but do NOT underestimate this risk. Historically, people almost always get their money out of these programs when a company goes bankrupt but just be aware this things can change very quickly.

Next Job Risk - You are 37 and think you might be with the company for the long haul. I seriously doubt it. And here's the issue, if you do move on, quess what, you will be getting paid from your new employer AND you will be getting deferred comp distributions from your old company which means you will be paying taxes on those distributions at the highest marginal rate. This also happened to me.

State Tax Risk -You mentioned that you are in a high tax state. You should check to see that if you move whether the state that you currently reside will come after the deferred compensation distributions after you move. My guess is they absolutely will. Again this happened to me.

I used to manage these programs for several different companies and my learning was that I would not participate in these plans in a very significant way until you are much older (like 55) and you are very sure it'll be your last gig. Otherwise, the chances you actually achieve what you want are minimal.
I hear you on all the risks. No one this forum will buy this because I’m not going to get into details about our unique company, but default risk is very low. I have a great reputation with CEO (who I also expect to be in place for a long time) which is why I suspect I’ll be able to stick it out; certainly there are scenarios that could end differently. One way I’m looking at it is that the money is getting taxed at the highest rate now, or the highest rate later (potentially even higher), but at least I’ll avoid the capital gains tax. Also, I don’t want to move out of state, so no chance for arbitrage there. Thanks for the response.
I had a wonderful relationship with our CEOs as well but in both cases, they left and a slimeball replaced them. If you know the CEO will stay on board until you are ready to pull the rip cord, then great!
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

While true (overly simplistic of course which I understand is on purpose), you can’t tax loss harvest, liquidity in case you want or need it, the additional costs or restrictions on investments within the plan and no step up in basis at death. When you give some value to these things and that the OP is very young for this type of plan and that he is thinking maybe I might need a loan, it just doesn’t make that much sense. Pretty much everyone thinks their marriage is forever but 50% don’t work out. This would be similar.
PowderDay9
Posts: 1001
Joined: Fri Oct 12, 2018 12:29 pm

Re: Deferred Compensation Plan Strategy

Post by PowderDay9 »

There are 2 main benefits to tax loss harvesting.
1. Defer capital gains to a later date. With NQDC, there are no capital gains at all.
2. Offset $3k of ordinary income per year. Most people who use a NQDC plan most likely have plenty of money in a taxable account to get this annual savings. You can do one tax loss harvest and have decades worth of $3k losses covered.

Liquidity is important but once you have enough, then putting 10-20% of your net worth into NQDC isn't an issue. The NQDC plans usually have emergency clauses where you can get your money in some circumstances. These plans are used once you've maxed out all of your qualified retirement accounts and typically you have fairly large taxable accounts.

The Fidelity NQDC plan we have has low cost index funds similar to the 401k. If OP has high fees that could make a difference.

No step up basis at death is for capital gains. There are no capital gains for NQDC. My example above would then yield equal results. However, most NQDC plans will pay out before you die. Wouldn't this same comparison be true for traditional 401k? I don't think it would make sense to say taxable is better because you can get a step up basis at death.
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

PowderDay9 wrote: Sat Apr 15, 2023 2:54 pm There are 2 main benefits to tax loss harvesting.
1. Defer capital gains to a later date. With NQDC, there are no capital gains at all.
2. Offset $3k of ordinary income per year. Most people who use a NQDC plan most likely have plenty of money in a taxable account to get this annual savings. You can do one tax loss harvest and have decades worth of $3k losses covered.

Liquidity is important but once you have enough, then putting 10-20% of your net worth into NQDC isn't an issue. The NQDC plans usually have emergency clauses where you can get your money in some circumstances. These plans are used once you've maxed out all of your qualified retirement accounts and typically you have fairly large taxable accounts.

The Fidelity NQDC plan we have has low cost index funds similar to the 401k. If OP has high fees that could make a difference.

No step up basis at death is for capital gains. There are no capital gains for NQDC. My example above would then yield equal results. However, most NQDC plans will pay out before you die. Wouldn't this same comparison be true for traditional 401k? I don't think it would make sense to say taxable is better because you can get a step up basis at death.
I have no issue with that if you are 50 or whatever and you do have a large taxable. The OP isn’t and thinks maybe I’ll need to loan against this. So tax loss harvesting is still in play.
The fees still are greater than taxable even if not by a lot and u can’t change providers if that changes.
Building up his taxable will also facilitate Roth conversions later.
I’m not against these. Just don’t see it as wise at this time for what was written.
PowderDay9
Posts: 1001
Joined: Fri Oct 12, 2018 12:29 pm

Re: Deferred Compensation Plan Strategy

Post by PowderDay9 »

Hopefully OP can clarify and provide more details about taxable, fees and liquidity.

The only thing I'll say about the age 50 or older recommended is I think it should be changed to within 5-10 years of retirement (or financial independence). If somebody is in their late 30s (like the OP) and they want to retire at 45, then I think NQDC could save hundreds of thousands in taxes and would be an excellent tool in a financial plan.
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Deferred Compensation Plan Strategy

Post by Rex66 »

The big problem with going to early is health care

I have individual family coverage in GA and a few years ago most of the individuals pulled out. We had bcbs who we liked reasonably enough. I despise the Cigna plan which was pretty much are only option at the time. Since then players came back but new health issues for family members got us. You need to be generous with health care assumptions if going real early.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

sf_tech_saver wrote: Sat Apr 15, 2023 12:50 pm I've used my mega-corps deferred comp plan over the years. I have about $600k in it, or about 10% of my portfolio. I'm 45.

Positive:

--Dead simple way to ensure a high savings rate! I think this is the #1 benefit, frankly. Lots of Bogleheads don't seem to advocate for them because they are paranoid about credit risk (fair), but savings rate simplicity is worth something to me too.

--My plan allows a "payout ten years after you leave" option. This then begins a 15-year pay-out plan. Since I'm 45, this is fine as I may be taking a step back in my career by then. Take a close look at these options in your plan.

--I live in California, where dividends are taxed like regular income, so its nice to let the income compound a little untaxed before I finally pay income tax on it.

--I COULD if I wanted to move to a lower tax state and live off the income (an optionality I don't have if I take the income now). Nevada is just next door...

Negatives:

--Beware, the software that powers these plans on Fidelity is clunky and infrequently used! My bonus defer vs. regular salary sometimes takes a year to synch! Be sure to carefully plan your payouts if it's on Fidelity as if you leave; it's a locked preference, not something you can adjust once you leave (why?). It feels like a lot of money to have in a pretty one-off plan interface.

--It does make planning out my expected future tax rate more complicated. I plan to take a 3% portfolio withdrawal approach if I ever quit working -- but now estimating my tax rate is more complex for sure.

Net, net:

I stopped doing it this year as I don't want it to be more than 10% of my portfolio, but I have no regrets about using it until now. It gives me a simple way to improve my savings rate and optionality if I want to move to a lower-tax state. I leverage a fidelity S&P 500 index for all the investments in my plan.

On loans, I keep a sizeable after-tax amount with Schwab, and they have a very slick pledged asset line interface. I highly recommend that for quick liquidity as needed. It might be worth building up enough after-tax portfolio at a firm like that first if you want that flexibility.
Good stuff, thanks.
Topic Author
Coastcat
Posts: 15
Joined: Mon Sep 05, 2022 1:42 pm

Re: Deferred Compensation Plan Strategy

Post by Coastcat »

momvesting wrote: Sat Apr 15, 2023 12:58 pm A quick non-financial question: How long have you been with this company? I'm just trying to see if you are settled in and judging your desire to be a lifer as a level-headed choice or if you are in the honeymoon phase with your job. I think this distinction should factor in to your decision.
10 year anniversary in July!
Post Reply