By Mike Gibbons, RICP®
For high-income individuals, such as pharmaceutical professionals and other medical employees, deferred compensation plans may be a familiar concept. These retirement plans, commonly provided by employers, are favored for their potential to significantly reduce taxable income, benefiting both the current working years and the future retirement period. By allocating a portion of their earnings to a deferred compensation plan, professionals can enjoy the advantage of tax-deferred growth.
For those with high incomes, this might seem like an attractive option. After all, any chance to defer current tax obligations is generally seen as favorable, correct? The answer is both yes and no. While deferred compensation plans offer certain enticing benefits, they also come with potential downsides that warrant consideration. It is essential to weigh the pros and cons of deferred compensation plans before determining if they are the optimal choice for your financial situation.
The Benefits of Deferred Compensation Plans
For pharmaceutical reps, deferred compensation plans can be a good way to save for retirement after maxing out contributions elsewhere because deferred compensation plans have no contribution limits. Consider these additional benefits:
Tax Mitigation Strategies
Do you live in a state with high-income tax but are considering retiring to a state with no income tax, like Florida? Deferred compensation plans help you save on your tax bill by allowing you to put more money into your plan and lower your tax bracket while you are working. You will not owe federal income tax on the funds contributed until they are withdrawn in retirement, typically when you are in a lower tax bracket. Additionally, if you are planning on moving to another state without an income tax for retirement, this could also provide some tax savings.
Retirement Income Bridge
Deferred compensation plans can be used to generate income for a couple or individual as they begin retirement and want to maximize their Social Security income by delaying collecting it until age 70. It can also be used to supplement income in retirement if the market has taken a hit and your portfolio has suffered.
Deferred Compensation Plan Drawbacks
While the pros of deferred compensation plans seem like incredibly useful tools for your wealth management strategy, there are some points to consider when using a deferred compensation plan.
Company Solvency Risks
This may be the largest risk you can face when using a deferred compensation plan. If a company declares bankruptcy, your deferred compensation plan could be completely or partially dissolved in the bankruptcy. This is because when you participate in a deferred compensation plan, you are considered to be a creditor of the company. Also keep in mind that if you choose a longer-term payout option, this increases the risk that the company may go bankrupt during this time. You should closely examine your company’s plan and consult a trusted financial advisor before participating.
Lump Sums Could Affect Your Taxes
Most plans do not allow you to access the money earlier than your retirement, however, if you change jobs, you may have to collect the money in one lump sum. Collecting one large lump sum could wreak havoc on your tax mitigation strategy for that tax year.
Lack of Diversification
Deferred compensation should always be coupled with other retirement strategies that don’t involve your company. This is because as an executive, you may have an inordinate amount invested in your employer’s stock. If the company suffers an economic blow, your employer’s stock could lose value and your deferred compensation plan could also be in jeopardy. This could be devastating to your retirement plan.
We’ve Got You Covered
Deciphering the pros and cons of deferred compensation plans can be daunting, but you don’t have to face these financial choices by yourself. At Gibbons Financial Group, we join forces with our clients to tackle their retirement planning obstacles together. We acknowledge that your financial strategy is a long-term commitment, and we are dedicated to guiding you through every step of your financial path. Our extensive client experience with pharmaceutical professionals has honed our ability to identify key factors and implement strategies that fortify your wealth management plan against risks linked to deferred compensation plans.
To discover more about our tailored approach to financial planning and assess our compatibility as partners in your financial endeavors, call 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation.
And be sure to join our free webinar, Retiring Early From Pharma.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2016 and 2018* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016/2018 Five Star Wealth Managers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.