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Non-Qualified Deferred Compensation Plans

February 23, 2023

Non-Qualified Deferred Compensation Plans: What they are, what your options are, and what you can do with a NQDC plan in the event of a job change or layoff.

A Non-Qualified Deferred Compensation (NQDC) plan is a type of retirement savings plan that allows employees to defer a portion of their current income into a separate account to be paid out at a later date.  Unlike a qualified plan such as a 401(k), the contributions to a NQDC plan are not tax deductible at the time of the contribution, but the earnings are taxed at the time of distribution.  A main advantage of NQDC plans is that they allow higher-income individuals to save a larger amount for retirement than they would be able to with a qualified plan.

When changing jobs or being laid off, there are several options available for NQDC plan participants, such as:

  1. Roll the NQDC over to an IRA: One option is to roll the funds from the NQDC over to an IRA.
  2. Roll the NQDC over to a qualified plan with new employer: The NQDC can be rolled over to a qualified plan with the employer if the new employer offers one.
  3. Leave the funds in the plan until retirement: You can leave the funds in the current plan until the time comes to retire.
  4. Cash out the funds: If the plan allows, the funds may be cashed out, although this may result in taxes and penalties being owned on the amount of the withdrawal.

Before deciding what to do with your NQDC plan funds, it is important to consider your current financial situation, future financial needs, and overall retirement goals.  It is also important to understand the terms of the plan and the tax implications of different distribution options.  Consulting with a Financial Advisor may help you to make an informed decision and maximize the benefits of your NQDC plan.

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