In an uncertain tax environment, a new thought leadership analysis from Clark Consulting entitled “Defer Income or Pay the Taxes Now” concludes that for highly compensated executives their primary consideration should not be their tax bill. Instead, they should focus on whether they are deferring enough income for their retirement years.
Several articles have recently suggested executives forego deferring any compensation into their nonqualified deferred compensation (NQDC) plans this year in anticipation of rising federal income tax rates that may be imposed on high-income taxpayers next year.
Given one recent study that found 13% of the highest-income earning group will run out of money just ten years after they retire, the Clark Consulting analysis suggests that most highly paid executives are probably not deferring enough, and suggests they defer more.
NQDC plans can be quite advantageous because when an executive defers compensation into a properly structured NQDC plan, the federal income taxes on that compensation, as well as on any interest or “earnings” that may be credited, are also deferred until the compensation is ultimately distributed.
In addition, deferring compensation into an NQDC plan can provide “a methodology for disciplined savings,” as it sharpens your savings instinct and helps ensure you will not tap into your “nest egg.”
The analysis is based upon Clark Consulting proprietary research that found that due to the power of compounding in a tax-deferred account, even when higher tax rates are in effect at the time of plan distribution, highly compensated executives “fare better when they defer into an NQDC plan than when they don’t,” with only one exception: “If you are in the top tax bracket and among the highest of highly compensated executives, don’t mind a low pre-tax return and are only looking to invest your income over a short period of time.”
The “Defer Income or Pay the Taxes Now” analysis is available at http://clarkconsulting.com under Resource Library, Articles and White Papers.
About Clark Consulting, LLC
Clark Consulting, LLC, headquartered in Dallas, is an AEGON company. AEGON N.V. is an international life insurance, pension and investment group based in The Hague, The Netherlands, with businesses in over twenty markets in the Americas, Europe and Asia.
Clark Consulting is a leading source of strategic financing solutions such as bank-owned life insurance (BOLI) and corporate-owned life insurance (COLI) for inefficiently funded and unfunded liabilities that result from executive and employee benefit programs.
Since 1967, Clark Consulting has assisted plan sponsors in implementing thousands of benefit plans and serves as the record keeper for billions in assets for leading American corporations and banks.