I am a little worried about my defered cop sometimes. I plow 25% (and about to be more) of my base salary plus 2/3 of my bonus into it. All to avoid taxes and grow tax defered etc. (just like a 401K).I know it is not protected like a 401K plan. It is still treated as an asset of the company. My company doesn't have any debt to speak of, so even in the case of bankruptcy, it seems like there is little risk to my deferred comp?thoughts?H
It is still treated as an asset of the company. My company doesn't have any debt to speak of, so even in the case of bankruptcy, it seems like there is little risk to my deferred comp?In the event of bankruptcy, these funds would be used to pay off the creditors. I don't know where deferred comp stands in the bankruptcy pecking order. It may end up being used to meet the payroll and pay the accounts payable.foolazis
Not to say it's a bad idea, but is there any reason you're doing deferred comp? Any benefit over a 401k? Or did you already max that out?
Yes. I'm maxed on 401K. This allows me to put away a lot more than 401K limits. Do these plans make anyone else nervous?H.
Do these plans make anyone else nervous?Nervous, no. Cautious, yes.I too contibute to a deferred comp plan, but only after maxing out both the 401k and Roth. I don't put nearly as much as you, I'm only doing about 5 - 8%. While I am totally confident in my company's solvency, and therefore don't worry about that aspect, our deferred comp plan simply doesn't offer terribly great investment choices and the fees are a little more steep than I would tolerate in an after tax account.My intent, is simply to build up a little bit of a cushion that will be paid back over my first 5 years of retirement. Hoping it eases the financial shock of leaving the workforce and the resulting income stream. I plan to retire about 5 years before being eligilble for either my (small) pension and/or social security.Would suggest you take advantage of Roth contributions before deferring just for the sake of reducing immediate taxes.Regards,Rick
A lawyer could tell you where on the bankrupcy queue you would be. you might google bankrupcy, deferred comp.
Curious how the deferred comp plan is funded - Mutual Funds, or some use Life Insurance?
Deferred compensation is only worthwhile if you believe that your future marginal tax rate is going to be lower than your current tax rate. If the rates are the same, you will pay the same amount in taxes. Set up an excel spreadsheet & see for yourself. I could write out the mathematical formula for you, but I don't know how to do it in html.If you are saving as much as it seems like, your marginal tax rate will not go down in retirement. I know mine isn't going to decrease.As far as I can see, taxes are as low as they are likely to be for a generation or longer. I would take the money now, pay the taxes and not have to worry about the company's fortunes.As an added benefit, you can invest the after-tax money and pay capital gains on any increase, instead of income tax. Or, if you want, you can buy real estate and through 1031 exchanges avoid paying any future taxes at all, right up until death. This is the only real tax "loophole" left to the upper middle class, and you have to die to take full advantage...The only drawback is that your account will seem smaller because it will be after-tax money instead of before-tax money. I prefer this myself, because it keeps me saving and investing more. If my current marginal tax rate is 40% (state and federal) $600k after tax is the same as $1M before tax, but I don't spend as much. And, when the relatives come a-knocking at the financial door DW doesn't think we are so well-off.OldOne And, there is the huge benefit of being the master of your own investment destiny instead of being at the mercy of someone else.
One thing to consider that is not mentioned in the above is state tax implications. If you live in a state with high income tax, you can offset that in retirement by moving to a state with little or no income tax. Additionally, some states that have income tax do not tax some forms of retirement income.If your tax rate will be the same in retirement, you are still better off avoiding the tax now as you will get the benefit of growth on money that you otherwise would not have (e.g. the taxes). The triple compounding effect of tax deferral is tool that cannot be easily dismissed.Additionally, while cap gains are low now, there is not guarantee that they will remain so. That is a huge issue before congress right now -- and one that looks like it may not be continued.
It would also be good to look into what happens to the funds if the company looses a large lawsuit or is merged with a less reputable or secure firm. There may also be complications if you want to leave to work somewhere else before retirement. A surprisingly small percentage of companies last more than a few decades so if you are looking at a long time before receiving the funds, then the situation changing is almost inevitable. You will also need to check to see just how and when the terms of the plan can be altered. There can also be unpredictable situations like a natural disaster or economic extremes like high inflation or a depression that might put your money at risk more than outside funds. You should also check to see what happens to your funds, and taxes, if you die before receiving the funds. I would personally feel more comfortable in your situation if I was sure that my basic long-term needs were already covered elsewhere and the deferred compensation was considered the "gravy" and a somewhat aggressive portion of my portfolio because of the lack of complete control.It sounds like a significant enough amount of money that it would be worthwhile having a lawyer or tax expert review your situation. Greg
p.s. also ask about any AMT implications.Greg
May also want to ask how whatever is funding the plan is owned - If the companies owns it outright, likely no creditor protection. If they are able to use a Rabbi Trust, you should be better protected.
Deferred compensation is only worthwhile if you believe that your future marginal tax rate is going to be lower than your current tax rate. ____________Other things to consider are, as pointed out, State Tax, AMT and do not forget to consider the time value of money. If it is deferred compensation and is not growing or growing at 3% or at 9% these rates can make a bigger difference than just the marginal tax rate. Consider;What kind of discount rate you should apply to determine the best NPV to you!??
Your deferred comp can be at risk in the event of a bankruptcy, you are really only dealing with a promise of the employer to pay you at a later date. The assets belong to the employer until you take constructive receipt of the assets. They pay all capital gains and dividend taxes on the investments.Finally, if your firm is acquired, the acquiring firm may not be bound by the promise your firm made. There are further protections that can be implemented such as holding the Deferred Comp in a Rabbi Trust. Ask your employer for more details on this and the protection they have for your benefit.Bill
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