How to handle deferred compensation plans?

I put my annual bonus into a deferred compensation plan which defers all taxes until withdrawal, the withdrawal is in 10 annual installments beginning at retirement. How should I enter this? Currently I include the bonus as part of my annual salary, put the accumulated balance in the "supplemental retirement accounts", and am not sure where to enter the annual savings amount (should I lump it together with my 401(k) deductible contribution or put it somewhere else)?


dan royer's picture

So to be clear: you receive an annual bonus that defers all taxes until withdrawal. Does that mean all future taxes on interest earnings, or do you mean that you treat this bonus as a contribution to your 401K (or at least like a contribution to your 401k in that it's a pre-tax contribution)?

The difference with this particular contribution, however, is that it must be taken out in ten equal installments?

And I'm not clear what you mean by entering "annual saving amount." Is this other contributions in addition to this bonus?

If you must keep that bonus money separate from the rest of the pre-tax contributions is that also because it earns a different interest rate? And I presume you don't know how much those ten equal annual withdrawals will be without doing a side calculation.

ESPlanner does treat ROTH withdrawals as their own group, but it treats all the others as one group of pre-tax dollars. So you might have to use special withdrawals to account for those required ten-year withdrawals. (if I understand you correctly).

I'm not sure how much variety exists in deferred compensation plans, but I can tell you how I understand my plan works and how I've entered the benefit payments into ESPlanner (best option I could find, but not taxed correctly).

My company has a Supplemental Benefit Plan that defers a percentage of my income on a pre-tax basis, to be paid out later after I retire, over 10 annual payments (so paid out after I retire, but not related to a 401k plan). I understand this future income will be treated as supplemental income and subject to federal (taxed at the IRS flat supplemental rate of 25%), state, and local taxes.

In ESPlanner I've entered this future income in Special Receipts (as Miscellaneous income) over the years I expect to receive the supplemental income payments. In the "Special Receipts" tab I selected "Taxable at ordinary rates". However, I understand supplementation income will be taxed at a flat rate (25% for 2014) rather than at ordinary or capital gain rates, so it's being taxed incorrectly. I couldn't find an option in the program to enter supplemental income.

If someone has a better solution for entering deferred compensation as supplemental income, I'd also appreciate your help.

I would enter the defferred compensation as a non taxable special receipt and the federal, state, and local taxes as non taxable special expenses.

Thanks for the help. I'm a new user of the software, this forum is very helpful. To help clarify, here is a simplified example...if I have 20 years to retirement and receive a $10K annual bonus which I put into deferred compensation (so it is not taxed when received, nor are earnings taxed prior to withdrawal) and invested in equities. After 20 years assume it has grown to $350K including appreciation. Over the first 10 years of retirement I receive a distribution of $35K/year ($350K divided by 10) and it is taxed as ordinary income for federal/state taxes. So in 2015 that $10K bonus is part of my earnings but is untaxed. At retirement I have a 10 year stream of receipts which I could estimate if that is the best way, but the actual amount is an unknown (based on returns) so ideally it would be included in monte carlo simulations, etc. The mechanics are similar to a 401(k) but the drawdown is different in that it starts immediately and lasts only 10 years.

retireGuy...sounds like we are talking about the same type of plan. One thing I will call out for you (at least based on my plan) is that while my company withholds at 25% for these types of plans, actual taxation is based on overall income. So if you're in the 28% marginal bracket, 25% would be withheld and you would owe the other 3% through estimated taxes or at filing.

dan royer's picture

Yes, Mike is suggesting that you not enter these receipts in the retirement area, but rather as special receipts (non taxed) and then in the Special expenses area, enter the taxes as non tax special expenses. YOu'll have to do a side calculation to know what those amounts might be.

Thanks for all the help. Would it work to put the compensation in special receipts and select "taxable at ordinary rates" vs. having a separate special expense?

dan royer's picture

I'm not sure. But it seems that means you don't pay the tax until you receive the money. Perhaps that makes a difference. Or perhaps that is when you pay the tax.

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