For business owners and highly compensated employees saving enough money through a company’s qualified retirement plan to maintain your current standard of living in retirement may not seem possible. In addition, other retirement income options like Individual Retirement Accounts (IRAs) and Social Security may make up only a fraction of what you might need.
Nonqualified deferred compensation (NQDC) plans offer a strategy to diversify your compensation and retirement investment savings options. If your employer offers an NQDC plan to you , reasons to consider participating in an NQDC plan include:
With an NQDC plan, eligible employees can accumulate pretax dollars beyond the contribution limits imposed under qualified plans. This may allow plan participants to potentially better fill gaps in retirement income, if any; however, assets in an NQDC plan are owned by the company until distribution occurs. Therefore, plan assets are subject to claims of the company’s general creditors.
Unlike 401(k) retirement options, NQDC plans do not have any IRS-imposed annual contribution limits; however, there could be limits on contributions imposed by the plan.
Employees in an NQDC plan can defer the receipt of their income to help reduce their current income tax burden and assist in more flexible, long-term tax planning. In addition, while a participant’s NQDC investments are subject to market risk and could lose value, they can provide tax-deferred growth to participants. All distributions are subject to income tax.
Depending on plan design, an NQDC plan may allow participating employees a choice of receiving distributions while still employed or upon termination. A participant is required to pre-elect the timing and method of distribution at the time of the enrollment period for the following tax year.
Benefit benchmarks1 (investment options) can be selected based on plan year of deferrals and on investment objectives. If a plan provides for interim distributions, participants may choose to diversify investments based on the specific deferral year in which they elected to receive contributions and applicable earnings.
1Benefit benchmarks are tracking mechanisms for participant accounts. Participants do not have ownership of the selected benefit benchmarks. Participant accounts will be credited with gains or losses as if such accounts had been invested at the net asset value (net of investment advisory fees) of the benefit benchmarks. As long as the participant has a benefit under the plan, they will be an unsecured general creditor of their employer for the amount of their benefit.
Representatives of GWFS Equities, Inc. are not registered investment advisers, and cannot offer financial, legal or tax advice. Please consult with your financial planner, attorney and/or tax adviser as needed.
Variable Universal Life (VUL) insurance policies (J355 Series, J378 Series and PPVUL Series) and appropriate state variations are issued by Great-West Life & Annuity Insurance Company; Corporate Headquarters: Greenwood Village, CO. Variable Universal Life (VUL) insurance policies (J355NY Series and PPVUL-NY Series) are issued by First Great-West Life & Annuity Insurance Company; Corporate Headquarters: White Plains, NY. Policies issued by First Great-West Life & Annuity Insurance Company are only available in the State of New York. Policies may not be available in all states. Certain restrictions apply.