It’s always good to be recognized for a job well done. Being encouraged to participate in your employer’s non-qualified deferred compensation (NQDC) plan, is one such vote of confidence; it is typically offered exclusively to choose executives or similar high-performing workers.
That said, just as it’s possible to take part in your company’s NQDC, doesn’t necessarily mean you should. But determining whether this advantage really benefits you requires careful planning and a good comprehension of the perks and perils involved.
What’s an NQDC?
If you are thinking this sounds very much like a conventional 401(k) plan, you’re correct. In actuality, your firm’s 401(k) and NQDC plans frequently share the exact same investment choices and recordkeeping.
Before you begin pouring all your hard-won pay in your company’s NQDC, there’s a big drawback you will want to know about: To preserve their tax-deferred standing, your player contributions have to be an unfunded and unsecured business obligation.
If your employer faces financial hardship, you could lose some or all the pay you have deferred in their NQDC accounts.
Cart vs. Horse Factors — NQDC Taxes
As touched on earlier, engaging in an NQDC may offer you a wonderful boost for tax-deferred retirement resources. But to prevent costly mistakes, you will want to make certain your personal financial situation lead the way, instead of your tax-planning”cart.”
For that, careful preparation is in order. Here are a few important considerations.
Your time horizon:
How long can you expect to maintain your NQDC generally, and each yearly contribution specifically (given possibly different distribution elections for every year)?
For distant time horizons, you could take additional investment risk in pursuit of greater expected returns. For those nearer in, you are probably best off allocating to safer holdings.
Relative tax rates:
Do you expect your tax rate to be higher or lower when you take your distributions vs. when you chose the deferral? If it is very likely to be lower upon supply, engaging in an NQDC plan may be beneficial.
Bear in mind, the Tax Cuts and Jobs Act of 2017 reduced the highest federal income tax bracket from 39.6percent to 37% — possibly temporarily. The best rate since the 1990s has been approximately 39.6%, besides 2003–2012 as it was temporarily 35%. If you reside in a high (or low) tax condition and intend to retire at a lower (or higher) tax state, the income tax legislation can be challenging.
We recommend consulting with an accountant or lawyer well beforehand.
No matter how strong it might appear, any corporation can unravel. Company-specific default risk applies to both gains.
When the chance of a default remains a concern, you could wait until you’re closer to retirement to contribute to the NQDC plan, or shorten the supply period after retirement. This further reduces your company-specific risk vulnerability.
Measure Twice Before Committing at After
Again, if circumstances are right, you might have the ability to reap appreciable tax breaks if you’re invited to take part in your organization’s NQDC. But we also counsel engaging in significant planning before you commit, to ascertain whether it is really likely to benefit you.