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Author: JoshRandall Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121592  
Subject: Re: Elective Deferred Compensation Plans Date: 6/3/2009 7:18 PM
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Which one(s)? They all have their own rules.

I thought there were only two kinds of nongovernmental DC plans. Elective, where I put my own money into it (no company contribution) and the other kind where the employer funds it with a promise to pay $x in the future for certain period of time.

Obviously, I'm no expert if there are more than two.

Here is the little that I know:

1. The DC plan, unlike a 401(k)plan, belongs to the company and the money I put in it is at risk if the company liquidates. All I have is a promise to receive these funds. This is what is called a non-qualified plan.
2. Even though the funds belongs to the company, I control the asset allocations and have an accumulated balance in my name only..
3. If I put, say, $25,000 in there each year, in addition to maxing out on a 401(k) with a catch-up contribution, both contributions are pre-tax and reduce my salary.
4. Each year I decide how much to contribute and how I want to receive the funds(Lump Sum or installments)upon retirement or other termination from the company.
5. None of my contributions vest. If they did, I wouldn't get a tax deduction each year.

Here's the question:

If one elects to take a lump sum, are all of the accumulated contributions (plus capital gains) made over several years 100% taxable in the year distributed to me? Or is there some kind of averaging allowed?

Which leads to my second question:
Since the election as to how you wish to receive the funds is made annually, can prior decisions for a lump-sum be changed to installments? (To average the tax bite over several periods assuming that all of it is taxed in the year of receipt under a lump-sum option)

Making contributions each year in which my tax bracket is near peak earnings provides a benefit equal to my marginal tax rate, which I expect will be lower upon retirement. So I naturally would like to spread the taxable distributions to me over as long of a period as is legally possible because they will be taxed at a lower marginal rate? Are there any rules or options for doing this? For example, if I choose the installment method rather than the lump-sum option, can I choose to receive an annuity over my expected life and then pay taxes only on the amount of the annuity at the existing tax rate in effect in the year of receipt, or is there a maximum number of years that you can spread the distributions.(Uncle Sam wants his money back as fast as possible I assume).

In summary, what is the best way to plan for future distributions from the DCP to minimize one's taxes?
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