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  #11  
Old 11-19-2018, 05:24 PM
ActuarialFun ActuarialFun is offline
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Unless I'm misunderstanding these plans, no one has mentioned what seems to be one of the biggest benefits of deferred comp plans: the fact that you get to invest your full, pre-taxed earnings amount for your chosen period of time rather than the haircut, post-tax amount.

If you are worried about your company's very long-term solvency, it seems to me that it's still worth it to defer it over a short time span, say five years. Here's a quick example. The example ignores the different overall tax rates you would incur by deferring your income, but it seems to me that any of us making $150k+ would see minimal differences.

Assume on 1/1/2019 you have $15k you could defer into a plan. Assume a 40% tax rate and 6.5% annual return.
  • Scenario 1: Forego the plan. $15k turns into $9k due to taxes. Over the course of five years, $9k turns into $12,331 in a taxable account. After five years, take your money out of the taxable account, pay taxes on the earned $3,331, and you have $10,998 left over.
  • Scenario 2: Defer the $15k. Over the course of five years, $15k turns into $20,551. After five years, get your deferred comp and pay your 40% tax. You have $12,331 - considerably more than $10,998.
  • Alternative Scenario 2: By 1/1/2024, tax rates have gone up 6%. So you defer the $15k, and you again have $20,551 pre-tax, but after 46% in taxes, you're down to $11,098 - still more than Scenario 1!!

Someone prove me wrong? Again, I must be missing something.
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  #12  
Old 11-19-2018, 11:17 PM
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Colymbosathon ecplecticos Colymbosathon ecplecticos is offline
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You are assuming 40% tax rate on all income --- long term capital gains get a more favorable rate.


But ignoring that for the moment, yes you have more present value income if you can defer taxes. The easiest way to see this is to compare immediate after-tax income with the present value of (income minus deferred tax). The discounting is done at the after tax rate, so the income today and the discounted deferred income are not equal. The balancing item is the present value of the after-tax interest earnings on the deferred tax.
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  #13  
Old 11-19-2018, 11:29 PM
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Arthur Itas Arthur Itas is offline
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Also need to consider a default rate, which may be negligible over a short time horizon but could be meaningful long term.
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  #14  
Old 11-20-2018, 06:03 AM
Don Quijote Don Quijote is offline
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Quote:
Originally Posted by Arthur Itas View Post
Also need to consider a default rate, which may be negligible over a short time horizon but could be meaningful long term.
if your company (still) has a stock ownership requirement for officers, put all of that in the non-qual deferred plan. Doesn't eliminate default risk, obviously, but reduces the pain.
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  #15  
Old 11-20-2018, 09:02 AM
ActuarialFun ActuarialFun is offline
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Quote:
Originally Posted by Colymbosathon ecplecticos View Post
You are assuming 40% tax rate on all income --- long term capital gains get a more favorable rate.


But ignoring that for the moment, yes you have more present value income if you can defer taxes. The easiest way to see this is to compare immediate after-tax income with the present value of (income minus deferred tax). The discounting is done at the after tax rate, so the income today and the discounted deferred income are not equal. The balancing item is the present value of the after-tax interest earnings on the deferred tax.
Thanks! I was overlooking the different capital gains tax. Some back of the envelope math says that takes away about 1/4 of the benefit that I was portraying above.
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  #16  
Old 12-04-2018, 02:50 PM
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use the NQDC plan as a bridge to early retirement. The tax benefits are huge in this scenario.

Defer x at 40% marginal tax rate...

Take out the total (our plan allows for over several years) in installment payments and you pay the graduated tax table.. first $X is tax free, then Y at 10%, etc.

Huge win to bridge the gap to retirement age
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  #17  
Old 12-04-2018, 04:53 PM
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Thanks for all of the responses. I will figure out what my investment options are this year and will likely hop in the plan at some point. I may wait until I get a bit closer and Iím more certain that I will stay with my company through to retirement.

For me, I think about five years from retirement seems like a good time to hop in. I could defer a substantial percent of my salary and bonus to build up some decent value over five years. I will lose some of the tax benefits with only five years to invest, but I will be more certain that I wonít leave and have to cash it out. I also minimize the risk that tax brackets shift by using a shorter duration. My income will come down a lot post retirement, so I would still get that tax benefit.
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  #18  
Old 12-05-2018, 01:33 PM
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Quote:
Originally Posted by ActuarialFun View Post
but it seems to me that any of us making $150k+ would see minimal differences.
That's the income cutoff at my company too. Is that some kinda regulation?
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