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How to Leverage Executive Compensation for an Early and Tax-Efficient Retirement

Matt Corthell |

We work with a number of executives in the Defense, Aerospace and insurance industries. Often times executives at these large companies get access to deferred compensation plans.

As the name suggests, deferred compensation plans or DComp plans allow you to defer collecting your compensation to a future year. As an executive, often the income you receive is far higher than your living expenses. By shifting compensation to a future tax year, you can potentially lower your tax bill.

For example, say a 55 year old executive making $500k is looking to retire at 60 determines they can defer $100k of compensation for the next 5 years with those funds being paid out at the start of retirement. By forgoing the $100k of compensation now, they don’t get taxed while at a high marginal rate given the remaining $400k of salary.

When the funds start being paid in retirement, the salary is no longer there meaning the $100k is likely to be taxed at a far lower rate. In addition, the payout of the comp plan makes for a “paycheck like” recurring income stream at the start of retirement.

This strategy is not for everyone and involves developing a retirement plan to access its usefulness and there are some risks:

  • Depending on your career length, if you continue to work longer than expected you could pull out the funds in a higher tax year than originally.

  • Tax laws could change nullifying the benefit.

  • While in the DComp plan, your earmarked salary becomes an asset of the company and should the company fail, these funds could be used to pay creditors.

  • Generally, in the DComp plan you have limited investment options to grow your compensation while it is in deferral.

  • These plans are generally not as liquid as other investments.

If you or someone you know could benefit from a review of their compensation, please feel free to contact us or schedule a meeting here.

Thank you for reading!

 

Disclosures:

Wooster Corthell and the author are not tax professionals and do not give tax advice. You should consult your tax professional regarding your individual circumstances.

 

This commentary reflects the personal opinions, viewpoints, and analyses of Wooster Corthell Wealth Management, Inc. “WCWMI” employees. The information presented should not be viewed as a comprehensive analysis of the topics discussed but instead is general in nature.

The views reflected in the commentary are subject to change at any time without notice. WCWMI makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented.

This commentary may contain information that might assist you in the development of subsequent discussions with the appropriate professionals and should not be construed as tax planning, estate planning or insurance advice. Neither WCWMI nor its employees are accountants, attorneys, or insurance agents. Therefore, please consult your tax professional, attorney, and/or insurance agent regarding your specific situation.

Wooster Corthell Wealth Management, Inc. has been an Investment Adviser registered with the Securities and Exchange Commission since 2001. Registration does not imply any level of skill or training. Additional information about us is available on the SEC's website at www.adviserinfo.sec.gov.