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Posted by on March 4, 2008, 11:00 am
My company is offering me the chance to defer part of my compensation
in a deferred compensation plan. The key features include:
1.It's a nonqualified plan (if the company goes belly up I am in line
with other creditors, however this is a large, well-established
company, so that risk seems minimal).
2. I can create several accounts with different allocations AND
different payout elections (which can be lump sum or annual payments
over 2 to 15 years).
3. The account balances will mirror the earnings (or losses) of
either the company stock, or any allocation I choose of variable
funds. The choices include fixed income funds, a real estate fund,
and a half dozen or so equity indexes, including major US indices,
the EAFE and an emerging markets fund. They are mostly ishares ETFs.
Here's how I'm looking at it, I'm wondering what I might not be
thinking of-
The benefits include shielding the income I defer from income taxes
(though apprently not from FICA). Earnings would also be tax-free
until I start taking payments. This is good.
The risks are that if I end up needing the money before I retire, I
will be taxed at the same or a higher rate as I am now (assuming my
compensation doesn't decrease). There is also the risk (in my mind
it's a likelihood) that tax rates overall will have to increase during
the next ten or fifteen years. There's also the aforementioned risk of
letting the company hold on to the money (i.e. them becoming insolvent
or bankrupt).
However, I could also look at the deferred compensation as a kind of
insurance policy against getting laid off in a major recession, or
becoming disabled, in which case I might be temporarily in a lower
bracket even before I retire.
Are their other risks and benefits I haven't thought of? Thanks in
advance for any input you can provide.
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Posted by Tad Borek on March 4, 2008, 12:48 pm
oliviagail@gmail.com wrote:
> My company is offering me the chance to defer part of my compensation
> in a deferred compensation plan.
>
> Are their other risks and benefits I haven't thought of? Thanks in
> advance for any input you can provide.
Count your blessings, a DC plan can be an excellent long-term benefit
that sets you up for early retirement with uninterrupted income.
You didn't mention tax/regulatory risk, the regs on these have been in
flux for several years. Find out exactly what your payout date/method
options are, and when/how you can change them, and pick the dates &
payout schemes for your sub-accounts carefully -- you may have to live
with them. There used to be a lot of flexibility with changes but it's
being reduced. And the scheme may be changed in the future, given that
DC (409A) plans are used strictly by high-income earners...they could be
an easy target for a Congress seeking tax hikes.
You seem to be aware of the bankruptcy risks associated with the plan
and that's of course something to keep an eye on constantly.
Be sure you're clear about the results of separation from service.
Lump-sum payout of all accounts (i.e. potentially a huge tax hit) but
with exceptions for retirement...so be clear also on what age(s) qualify
for retirement and make sure that fits into your life plan. Or, you
might make use of that -- it could provide you an income source for a
single year, if you want to take time off sometime between jobs. Just
don't quit during a month that makes that lump-sum payout land on top of
a year's worth of salary income.
Company stock in a DC plan really concentrates your risk in the company.
Granted many people have build tremendous wealth that way, but there's
something to be said for diversifying your investments in case your
job/company go belly-up, or simply underpeform the alternatives.
You do pay FICA (really, Medicare) taxes but the effects on the tax
return can be substantial. This is all marginal income that is being
deferred and the typical DC participant might be saving 45+ cents on the
dollar in taxes, factoring in state & federal taxes, and phase-outs
pegged to AGI.
-Tad
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Posted by on March 5, 2008, 4:36 pm
Thanks, Tad
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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