Different parts of the retirement planning equation have different benefits and are better suited to some individuals than others. To understand which parts are more ideal for your planning, it’s important to understand how different plans work.
Today, we’re going to talk to advisor Paul Sorenson about nonqualified deferred compensation (NQDC) plans. He’ll tell us some of the important items to consider when looking at NQDC plans and how they might fit into an existing retirement plan.
What are NQDC plans?
Nonqualified deferred compensation plans (NQDC) are offered by employers to employees to set aside tax-deferred compensation to be paid out at a later date. For employees who maximize contributions to their current employer-sponsored retirement plans like a 401(k) or 403(b) an NQDC represents an opportunity to save more for a future goal or retirement in a tax-deferred manner. Not all employees have the chance to participate in an NQDC plan but if you have the opportunity, it may be worth looking into this benefit a look to see if it might have a place as a part of your financial plan.
Unlike other qualified employer-sponsored plans, such as a 401(k) or 403 (b), NQDC plans usually allow you to defer receiving a portion of your compensation over and above what is allowed into a qualified plan. When you elect to participate, you choose how much to defer to the plan and your employer then segregates the chosen potion of your salary into a trust which is invested on your behalf. Since the compensation is not paid to the employee currently it is not taxed until some future date when it is actually paid out to the employee.
There are many reasons employers offer NQDC plans but among the most common are their ability to help retain and attract talented employees as well as helping high-earning employees save enough of their current compensation to meet future needs. Typically high-earning employees are unable to save enough in a pre-tax 401k or 403b account to meet their retirement goals in full.
NQDC participation: Some important items to consider
NQDC plans can vary widely depending on what your employer offers but here are general items to think about:
- Do I currently contribute the maximum to my current employer-sponsored qualified plan such as a 403(b) or 401k? If you do not maximize contributions to your qualified accounts, you may want to consider this option first, since these plans are tax-deferred and protected under the Employee Retirement Income Security Act (ERISA).
- Do I believe my employer is financially secure? Should your employer fall into bankruptcy, the funds in NQDC plans might be accessible to the organization’s creditors which could mean your deferred compensation might not be paid.
- Can I afford to set aside a portion of my compensation knowing that I won’t be able to access it until a date in the future? NQDC plans do not have loan provisions like other employer-sponsored plans, so accessing the compensation which has been set aside is not an option prior to the distribution date that has been set.
- How does participation in an NQDC plan fit with the rest of my financial plan? Every NQDC plan is different so it is important to understand the distribution options, investment options, vesting options and service requirements available to you and along with the risks. Once you understand these risks these details the NQDC should become a part of your full financial plan.
Every NQDC plan is different and it is important to understand the details and risks of your employer’s plan before choosing to participate. For many, NQDC plans present a possible option to ramp up their savings for the future, but for others investing in accounts outside of their place of employment or combining multiple savings vehicles might be a better option.
No matter what you decide, working with a financial professional, like a CERTIFIED FINANCIAL PLANNER™ professional, who can help you understand the options and set a strategy to pursue your needs, wants and wishes for today and well into the future is a good place to start.
If you are trying to understand how an NQDC plan might fit into your financial picture or are just ready to get started with a well thought out financial plan, contact Paul Sorenson at Puckett & Sturgill Financial group today!
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.