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Deferred Compensation Plans
[/fusion_text][fusion_text]I like to think of Deferred Compensation Plans like your 401k plan on steroids. Don’t get too excited. Steroids are illegal in this country without a doctor’s prescription. You need to be careful how you use them, just like your deferred comp. plan.
Deferred Comp. plans come in many shapes and sizes. The basic concept is just as it sounds, you can choose to defer a portion of your salary and/or bonus to a later date. You can shift income from today (when you’re in a high tax bracket) to a future date after you retire (when you’re in a lower tax bracket because you are no longer working).
So what’s not to like?
- Any comp. you defer is earmarked for you, but legally you are an unsecured creditor of your employer. You have basically accepted an I.O.U. This is the biggest difference between an actual 401k and a deferred comp. plan. If your company goes out of business, your 401k plan is protected. That’s your money. Your deferred comp. is not protected. Get in line with everyone else hoping to salvage some of what they are owed.
- You need to decide in the year that you defer salary, what year you want to be paid out. It’s hard to plan that many years ahead and know you’re making a smart choice about what tax rate you’ll be in. Related to this, your payments will be accelerated if you change jobs. As soon as you leave your current employer, that money starts to get paid out. That can mean you’re taxed on it while you’re still working. You’ll probably be in a high tax rate and won’t get any advantage from lowering your tax rate. And, no, you cannot roll your deferred comp. over into an IRA to keep the tax deferral going.
- If you are being offered a deferred comp. plan, you are a valuable employee. It’s safe to say you already have your career and a nice pay package (maybe options, restricted stock, big bonuses) depending on your company. Don’t get greedy and double down on your company’s future success. Odds are you are already quite dependent on it. Take most of your salary and bonus and diversify it.
Of course, nothing is black and white. There can be real advantages to deferred comp. plans that make sense in some situations. For instance, there may be a match available for contributing. You may be close to retiring and better able to assess your tax rates after retirement.
Each plan and each situation is unique. Consult with your investment advisor before you participate. That’s not regulatory mumbo jumbo. I actually mean that. It’s complicated enough that it’s worth paying for advice. If you ever want me to look at your deferred comp. plan, please ask. I review a few each year.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.