Company I am working for offers a deferred compensation plan. As per this plan we can defer certain amount of our salary/bonus which will also enable
to defer federal/state income taxes.
If the deferred amount is invested in the company stock, company provides a 25% match on the contributed amount.If we select to invest in a "Bond Index" fund,company will credit with an interest rate equal to a bond fund.
I guess, getting a 25% match from company is good. Can you pls advise
1]Participating in the plan is good or not
2]If its good to participate, which is the best one to consider. Contributing to Company stock or Bond Index fund?
Thanks
How good are Deferred compensation Plans?
How good are Deferred compensation Plans?
Deferred compensation plans are great way to sock money away tax deferred and also get a good return. While they are like 401K, there is a difference.
You technically do not own the money, the company owns it and under a bankruptcy for example, a 401K ownership for the employee is preserved but for deferred compensation plans that ownership is not preserved. Some companies create trusts etc with employees as beneficiary, but they only protect from say misuse by the company of the money. In a bankruptcy the trusts will not be protected. As long as the company is sound, these are excellent plans because the returns are fantastic. The returns accrue from the bonuses the company provides such as 255 of stock or doubling up the bond return etc.
You need to be cognizant of the exit plan. Check your plan documents about exit plan. When you leave the company and you take all the deferred compensation money, that will accrue as income that year with very high taxes. So check what alternatives your company offers and whether those are what you want.
With above as some things to keep in mind, I will once again reiterate that they are generally excellent to build an asset base because of high gains rate.
You technically do not own the money, the company owns it and under a bankruptcy for example, a 401K ownership for the employee is preserved but for deferred compensation plans that ownership is not preserved. Some companies create trusts etc with employees as beneficiary, but they only protect from say misuse by the company of the money. In a bankruptcy the trusts will not be protected. As long as the company is sound, these are excellent plans because the returns are fantastic. The returns accrue from the bonuses the company provides such as 255 of stock or doubling up the bond return etc.
You need to be cognizant of the exit plan. Check your plan documents about exit plan. When you leave the company and you take all the deferred compensation money, that will accrue as income that year with very high taxes. So check what alternatives your company offers and whether those are what you want.
With above as some things to keep in mind, I will once again reiterate that they are generally excellent to build an asset base because of high gains rate.
How good are Deferred compensation Plans?
Thanks for the insight Desi. One more question which I could not get by reading the company policy document on this :
The closing Price of the company stock on the business day prior to your distribution date will be used to value the stock portion of your account.
What does the above stmt mean?...
Say if I hold the money in this account for 3 years, at the end of the 3 year if I want to take the money...Will it be given based on the stock price of that day prior I want to withdraw the money?.
Will I loose money if the company stock price goes down by the time I withdraw money?
The closing Price of the company stock on the business day prior to your distribution date will be used to value the stock portion of your account.
What does the above stmt mean?...
Say if I hold the money in this account for 3 years, at the end of the 3 year if I want to take the money...Will it be given based on the stock price of that day prior I want to withdraw the money?.
Will I loose money if the company stock price goes down by the time I withdraw money?
How good are Deferred compensation Plans?
r2isans;31801Thanks for the insight Desi. One more question which I could not get by reading the company policy document on this :
The closing Price of the company stock on the business day prior to your distribution date will be used to value the stock portion of your account.
What does the above stmt mean?...
[/quote]
Let us assume that after contributions over the years from you and company you own xx shares of the company when you take a distribution. The company is going to pay you not xx shares but they will pay you the amount the xx shares are worth. In finding this value or worth of the account, they will use the closing price of the stock one day prior to the date of the distribution.
Let us take a concrete example. Let us say you own 1250 shares on October 12, 2011 and you have left the company and have asked for distribution. Let us say the distribution occurs on October 12, 2011. The company will look at the closing price of the stock on October 11, 2011 and multiply that with the number of shares you hold (1250 in this example) and that amount will be your distribution from the stock portion of your account.
[QUOTE]
Say if I hold the money in this account for 3 years, at the end of the 3 year if I want to take the money...Will it be given based on the stock price of that day prior I want to withdraw the money?.
Yes, as explained above.
[QUOTE]Will I loose money if the company stock price goes down by the time I withdraw money?
You could lose money if the company stock goes down. Note however that you are getting 25% match. Also, you have some other lower risk options too in your plan.
How good are Deferred compensation Plans?
Thanks a lot for the explanation Desi....I got it..