My company offers a deferred compensation plan where I can choose distribution at retirement or spread payments out over five, 10, or even 15 years. I’m worried about locking myself into the wrong choice, especially with unknowns around tax law changes or retirement timing. How do I decide the right distribution schedule?
When you’re deciding how to take deferred compensation, you’re really weighing three main factors:
- Company solvency – Will your company still be around to pay you 10 or 15 years from now?
- Taxes – How will different payout schedules stack on top of your other income and affect your bracket?
- Liquidity needs – Do you actually need the money sooner rather than later?
Let’s break that down.
If you’re close to retirement, stretching payments over 10 or 15 years might make sense. By the time those checks are coming in, your earned income may have dropped off, and you’ll only have to think about RMDs in your 70s. The risk is more about whether the company will still be around to pay you.
If you’re younger—say mid-40s—spreading payments out could backfire. Those deferred comp checks could land right on top of a higher-paying new job, pushing you into a bigger tax bill year after year. In that case, a shorter payout might be better.
Smaller balances (say $50,000 to $100,000) are often easier to just take as a lump sum. The tax hit isn’t going to be large enough to justify dragging it out for years while you take on company solvency risk and complexity.
One other thing to remember: tax laws change. Today’s historically low rates won’t last forever. If you’re looking at a 15-year payout schedule, you’re also exposing yourself to the risk that rates rise in the meantime.
The takeaway
Don’t just check a box. Map out your expected income and tax brackets over the next five, 10, and 15 years, knowing it won’t be perfect but it will help you see the tradeoffs. Balance that with how much faith you have in your company’s future and whether you actually need the cash sooner. With those pieces in place, the right schedule for your deferred compensation plan becomes a lot clearer.
For more perspective on deferred compensation, listen to the full podcast episode here.