There are obviously many retirement vehicles you, as a corporate executive, have considered, but have you overlooked the option of the company-sponsored non-qualified deferred compensation plan?
Significant wealth may be created in NQDC plans, where assets have the opportunity to compound tax-free and investment options are frequently attractive. Two times a year, corporate executives are offered the option of deferring a portion of their compensation in order to put away money for their retirement in these plans. Quickly approaching is the June 30 deadline for deferring variable or incentive compensation for this year.
Basic modeling shows that assets invested inside a deferred compensation plan for 10 years would grow 1.75 percent more annually than the same amount invested for the same period receiving identical returns.
While those returns are real money, it is important to remember there are, of course, risks associated with investing, as well as eventual tax payments. As such, there are six questions that can help you determine whether deferring compensation is a good choice ahead of the upcoming June 30 deadline:
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While asking these questions of yourself, it is important to consider the impact of deferring. For example, it is usually best to defer for at least seven years to take full advantage of tax-deferred growth. While there are no federal limits to contributions to NQDC plans generally, a company's particular plan may impose certain limits on the amount you can defer, either each year or as an aggregate over multiple years.
If you have reviewed the questions and considered all the risks and rewards, you still have time to defer. Your company will likely notify you about the upcoming election and supply the correct paperwork.
When filling out the forms, you will be able to choose the options that best suit your needs. This includes whether you want the compensation (when you do receive it at a later date) as a lump sum or in annual installments, as well as when you want to receive the deferred income: in a specific year, upon a specific event such as retirement or after a number of years of deferral.
Some plans also offer the opportunity to re-defer compensation so long as certain criteria are met. In this circumstance, you can not only alter the timing of your distribution(s), but also the mode of distribution (lump sum versus installments). In addition to confirming that your company's plan allows for re-deferral, carefully consider three other key requirements:
Are you worried about missing the deadline? Never fear: If an executive is not ready ahead of June 30, December 31 is the deadline for deferring fixed compensation (or a combination of performance and fixed compensation) for the following year, making now a good time to consider all available plans and options.
— By Robert Barbetti , head of executive compensation advisory at JP Morgan Private Bank