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Why would anyone do deferred compensation? My company offers it and was just curious.
Tom
Tom
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Deferred income taxes are probably the biggest issue.
My husband would like to retire somewhere in his 50's but most retirement savings are tied up one way or another until age 59 1/2 or later. We look at this as one way to set money aside with deferred tax benefits, but be able to access it at an earlier date. -
I was thinking that as well. I'm in the 39% tax bracket right now and would love to defer some income. But I looked at my plan and they only pay he prime rate on the deferred income until I withdraw it. That is essentially zero growth. So the math I need to do is saving 39% federal, 15% state and 1% local tax (I still pay FICA) now, vs what I might pay 10 years from now. And betting my company won't go bankrupt. Would be a simple decision if I could earn 6% and it was guaranteed. But, alas, it is not.Comment
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It's one of the best decisions you can make on your future. I just retired at 55 and receive a retirement that pays me 100% of what I was making while working. I know that's great and all, but when I started with my employer I also joined the Deferred Compensation program (457 plan) and was able to defer thousands of dollars each year thus lowering my taxable income.
30 years later and I now have well over half a million dollars just sitting there. Talk to your tax or financial planner to see just how this program will help you. I'm glad I did it, the younger you are the better. With most plans you have various options as to how you wish to invest and withdraw your money.Comment
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I'm going to revive this thread as I have been thinking more about this. Right now, I pay 45% tax on every dollar I make (39% federal, 5% state, 1% local). When I retire, I plan to make that number 28% (28% federal tax, no state, no local) by moving to a no income tax state like FL or TX. Here's the math I came up with for $100,000:
Take it now:
$100,000 income
$45,000 tax @ 45%
$55,000 left
$81,413 invest $55,000 @7% taxable (4% after tax return) for 10 years
This scenario irritates me because I get to pay 45% tax on the original income and 45% on the returns for 10 years
Defer
$100,000 income
$134,392 value after 10 years @ 3% APR (that's what my company pays on deferred salary)
$37,630 taxes @ 28%
$96,762 net
I'm $15,000 ahead by deferring. If I do this for the next 10 years (about when I plan to retire), I will be $150,000 ahead by deferring $100,000 / year.
Now if I can move to the no tax state now, it gets a bit less appealing:
$100,000 income
$39,000 tax
$61,000 left
$90,295 after 10 years @ 4% after tax growth rate
Now I'm only $6,700 ahead.
Hmmm... seems as I have typed this, I found the answer: move to a state & town with no income tax. That will bear an immediate and lasting 6% ROI immediately.Comment
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I'm not sure I understand the math.
Are you saying your effective tax rate you're paying is 45%? We have a progressive tax system here in the US, so this year if you make $432k/year or more, you'd fall into the 39.6% bracket, but that does not mean all your income is taxed at that rate.
What am I missing?History will judge the complicit.Comment
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That means everything I make over $432,000 is taxed at 39.6%.Originally posted by ua_guy View PostComment
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Why are you paying 45% on the returns? Shouldn't you be looking at the long term capital gains rate? And you will pay tax on the dividends each year, but you only pay capital gains tax when you sell.Originally posted by tomhole View PostComment
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Good point. What would be a reasonable after tax rate of return if the money is in the markets? I have been using 7% for tax deferred growth and 4% for taxable growth in my retirement calculator. I think I found that somewhere on the interweb. Upping that just 1% makes a difference over the next 15 years.Originally posted by autoxer View PostComment
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