A Non-Qualified Income Deferral Plan Can Close the Retirement Income Gap
American Benefit Corporation's Jim Herlihy has just released a new article illustrating the tax advantage of using a non-qualified deferred compensation plan to fund for retirement.
Art Linkletter said in his book Old Age is Not for Sissies that old age is not for the timid. If old age isn't for the timid, imagine old age without adequate retirement income.
While everyone should accumulate funds during their working years for retirement, the highly compensated are the most vulnerable. Their children are unlikely to get meaningful college financial aid, thereby increasing their educational costs, and government regulations limit the amount of retirement income that can be delivered by 401(k)s and pension plans. The solution may be a non-qualified deferred compensation plan combined with proper planning.
The mechanics of a proper retirement plan are simple. Calculate what existing company benefit plans and Social Security will provide in estimated retirement income. If the calculation shows a retirement income deficit calculate how much would need to be deferred to a non-qualified plan in pre-tax income each year to close the gap. If an individual doesn't feel comfortable doing this calculation, his accountant can be asked for assistance or a financial planner may be hired.
While income taxes may go up in the future this may be offset by the tax deferred accumulation of funds and by moving to a state at retirement that does not have an income tax. It is not necessary to be smart to accumulate funds for retirement, but it is necessary to have discipline.
Consider an executive currently age 50 who decides to save $60,000 per year on his own with after-tax money. If he saves for 15 years, at age 65 he will have accumulated $699,794, assuming he earns 6% (3.6% after tax) per year and is in a 40% federal and state tax bracket. If he elects to spend these funds over 10 years he will have $84,569 per year after tax. If he elects the same savings amount with a deferred compensation plan, the full $60,000 will be invested each year and will be credited with the pre-tax interest rate of 6%. At age 65 he will have accumulated $1,396,558. If he elects a 10-year payout and 6% is credited each year to his declining balance, his annual pre-tax payout will be $189,747 and his after-tax income, assuming a 34% federal rate and no state tax, will be $125,233, a 48% increase. The advantage is clear.
Non-qualified income deferral plans have stood the test of time and are a very effective executive planning tool. Within the limits of IRC Sec. 409A they can be quite flexible.
At American Benefit Corporation, we design, fund and manage executive non-qualified benefit plans for highly compensated corporate executives who wish to reduce current income taxes and form personal capital on a tax efficient basis. Established more than 30 years ago, we serve the unique needs of executives in numerous corporations with their personal capital formation objectives.
This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor. Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value.