Shade shadow in the Deferred Compensation Plan

Aug 6th, 2022
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How to shade shadow in the Deferred Compensation Plan

4.7 out of 5
12 votes

heres our example weve got Paul and Jessica they have 150 000 that they want to defer to the Deferred Compensation Plan each year and they want to do that for the next 10 years so heres how it looks theyre going to get about two million dollars as the final value of their DCP plan when they retire so lets look at how this pays out lets say that they choose to take a lump sum they find themselves in the 37 tax bracket defeats the purpose of doing this theyve avoided being in the high tax bracket only to push themselves in the highest tax bracket again things do start to change when they stretch them out they do a 10-year payout theyre looking at the 24 bracket if they take the 15-year payouts about 133 000 a year if theres no other income thats the 22 bracket is their highest bracket for the year so as you can see these tax brackets widely vary depending on which payout option you choose and this is the key component to the Deferred Compensation Plan you want to take yourself

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Deferred compensation plans cannot generally be accessed early. Many workers may not be able to afford to defer compensation. Deferred compensation plans can be at risk if the company goes out of business or files for bankruptcy.
Because receiving the income you deferred isnt guaranteed, its critical to consider the financial health of your employer when deciding whether to participate in your NQDC plan.
A deferred compensation plan withholds a portion of an employees pay until a specified date, usually retirement. The lump sum owed to an employee in this type of plan is paid out on that date. Examples of deferred compensation plans include pensions, 401(k) retirement plans, and employee stock options.
Unlike a 401(k), your deferred compensation account is not yours; it is the property of your employer and is subject to potential loss. If the company goes bankrupt or cannot pay its bills, you may lose the compensation you deferred.
Depending on your plan provisions, the payment of the deferred compensation can also be structured to reduce your tax liability based on a series of installment payments or lump sum payments based on a specified time. By spreading out the payments, you potentially could reduce your income for each applicable year.
The plans carry some inherent risk for the employees in that the deferred payments are unsecured and not guaranteed. So if the organization faces bankruptcy and creditor claims, the employees may not receive their promised funds. (In contrast, qualified plans such as 401(k)s are protected from bankruptcy creditors).
Deferred compensation reported on a W-2 form for 1 year but earned in a previous year is also considered a special payment. Usually, those payments will not affect your Social Security benefit if its for work done before you retired.

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