This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here for the full discussion.
A listener asked:
“I’ve been offered deferred compensation from my employer post-promotion. Should I max this out and wait to pull it in retirement?”
At first glance, a deferred compensation plan can sound like a great opportunity—especially if you’re in a high tax bracket. But as with most financial decisions, the answer depends on your timeline, your confidence in your employer, and the details of the plan.
Here are the key considerations you should think through before committing.
1. How Close Are You to Retirement?
If you’re just a few years away from retirement, the risk involved in using a deferred compensation plan is much lower. A company is unlikely to fold within a five-year window, and the deferral can help reduce taxes during your peak earning years.
But if you’re early in your career—say, in your 20s or 30s—you could be deferring compensation for decades. That’s a long time to depend on the financial stability of your employer. If the company fails or gets acquired, you may not see that money at all.
Remember, you don’t own the money in a deferred compensation plan. It’s not protected in the same way as a 401(k) or IRA. You’re relying on the company to hold it for you—and still be around when you retire.
2. How Much Are You Planning to Defer?
Even if you’re confident in your company’s future, it’s still risky to defer too much. For example, if you start deferring large amounts in your early career and that money compounds over time, you could end up with millions of dollars tied up in your employer’s hands.
That may seem like a good problem to have—until it’s time to withdraw.
3. What Are the Payout Rules?
This is one of the most overlooked issues with deferred compensation plans. Many of them come with fixed withdrawal rules, meaning you may be required to take the money out on a set timeline after you retire.
Some plans require you to withdraw the entire balance within one to three years of retirement. That’s manageable if you’ve only deferred a small amount. But if you’ve built up a large balance, you could be forced to recognize hundreds of thousands or even millions of dollars in income all at once—at the highest possible tax rate.
We’ve seen people caught off guard by this. They made what seemed like smart deferrals during their career, only to end up with an enormous tax bill they hadn’t planned for.
To make matters worse, these payout rules can change over time—either between companies or even within the same company. So the plan you sign up for today may not work the same way in ten years.
4. Do You Have Better Options?
In some cases, you may be better off skipping the deferred comp plan altogether and investing that income in a taxable brokerage account. That gives you full control over withdrawals in retirement, and any gains will be taxed at long-term capital gains rates—typically lower than ordinary income.
This route can also give you more flexibility and control, allowing you to manage your tax bracket year by year rather than being locked into someone else’s withdrawal schedule.
Final Thoughts
Deferred compensation plans can be helpful—but only under the right conditions. Before maxing one out, ask yourself:
- How close am I to retirement?
- How confident am I in my employer’s long-term stability?
- How much am I planning to defer?
- What is the required withdrawal timeline?
- Will this plan give me control over my income in retirement—or take it away?
The goal is not just to defer taxes, but to preserve flexibility. Whenever possible, you want control over when and how your money comes out.
To learn more about how deferred comp plans compare to other savings strategies, listen to the full episode here.