Commentary-Deferred Compensation-Print

CASH FLOW MANAGEMENT

ECONOMIC & MARKET INSIGHTS

Deferring Income Saves the Best for Last for High Earners By David Stubblefield

Many workers have access to deferred compensation programs for their retirement through the familiar workhorse 401(k) plan, which allows participants to set aside pretax money that will eventually benefit them when they separate from employment into a presumably lower tax bracket. For certain highly compensated employees there are non-qualified deferred compensation programs that can continue these pretax savings for their compensation that goes beyond the amount considered by law ($270,000 in 2017) for qualified plans. While similar to qualified plans in the ability to save money on a pretax basis, there are significant differences to consider. If you are fortunate enough to work for an organization that offers these types of plans, and you are eligible to participate, you should revisit the potential benefits offered by these plans. This commentary will explain the primary benefits and concerns with using a nonqualified deferred compensation plan. The primary benefit of deferred compensation programs is the ability to continue employee and employer contributions of your qualified plans (such as your 401(k) or company pension) on your compensation above the amount considered for qualified plans. This allows for increased current tax deferral and tax-deferred growth on greater amounts of money. For example, an executive who consistently earns more than $270,000 and has the ability to save additional money may want to consider deferring some of the income until the money can be distributed and taxed in a more favorable tax environment (usually in retirement). If you are a participant in one of these plans, make sure you revisit your options when your enrollment period comes around. The election to defer compensation for a particular year is typically irrevocable. This is one reason why it is very important to review your cash flow needs before making a decision. With that in mind, here are the three critical components of your plan you must understand: 1) RISK OF FORFEITURE In the 401(k) plan, your funds are protected by law. Deferred compensation plans allow tax deferral due to the risk of forfeiture. Risk of forfeiture means the income you earned but previously deferred into a deferred comp plan is “Non-Qualified” and considered a promise to pay by your company - not a protected account like your 401(k). If a company goes bankrupt, you simply become just another unsecured creditor in line with your hand out hoping to get paid what is owed you.

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