Leaving Your Employer? How to Avoid Also Leaving Half of Your Deferred Compensation to the IRS.

Have you ever wondered what happens to your non-qualified deferred compensation plan (NQDC) when you leave your employer?  As a reminder, NQDC plans allow executives and other employees to defer a portion of their compensation, as well as the income taxes due, until the balance in the plan is paid.

When you leave your employer, NQDC funds cannot rollover to an IRA, so you will receive the money as a taxable distribution.  If not properly planned, you may end up with the entire balance as taxable income – at your highest marginal tax bracket.

The good news is that there may be more flexible alternatives to a lump sum payment, so it is critical to understand your distribution options and plan ahead when you choose to participate in an NQDC Plan.  For example, you may be able to select installment payments instead of a lump sum or choose when to have the distributions begin (i.e. at separation from service, retirement, or some period after retirement).

Here are some key questions to consider when choosing your distribution schedule:

  • Does the timing of distributions match my financial goals?
  • Will I sabotage my “Roth Conversion Sweet Spot”? (the time between retirement and required minimum distributions when you can take advantage of lower income tax rates for Roth Conversions).
  • Are my investments aligned with my time horizon?
  • Can I change my previous distribution elections?

Do you have additional questions about your non-qualified deferred compensation plan, Roth conversions or financial planning in general?  The Advisors at Wingate would be happy to help.  And if you’re switching jobs, please check out our checklist of things to consider in the process (beyond just NQDC). 

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