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When Higher Tax Rates Make Nonqualified Plans More Attractive

Nonqualified deferred compensation (NQDC) arrangements remain a valuable planning tool for people with high incomes. This article discusses the reasons why current tax rates have made NQDC plans attractive. It also examines how certain features of NQDC plan design can cause you tax problems.



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Key Points in This Article
NQDC offers advantages with federal taxes. Additionally, tax-rate increases in many states are leading some executives to take advantage of federal legislation on the source tax law. When you move to a new state in retirement, it can protect your NQDC distributions from tax in your former state of residence.
Weigh the pros and cons of a lump-sum payout versus installments. A lump-sum distribution can result in a higher tax rate. It can be more beneficial to stretch the payments out in installments over 5, 10, 15, or even 20 years instead. However, with installments your scheduled distributions remain at risk, as you continue to be an unsecured general creditor of your company, and your tax rates may rise.
In general, think about the amounts to defer and how that money is invested; but make predictions about your future tax rates, how you take distributions, and where you retire, as these may be even bigger factors.