Against the backdrop of the tax deal in Washington, we have finished a new tool of timely interest. Even though Congress has extended the current tax rates through 2012, many executives and employees want to determine for the long term whether they should defer their compensation into a 401(k) plan, a 403(b) plan, or a nonqualified deferred compensation plan (and remember that the tax-cut extension raises the possibility of tax increases in 2013). Our recently launched sister website myNQDC.com, the only online resource exclusively devoted to nonqualified deferred compensation (NQDC), has enhanced its expert content with a unique calculator and modeling tool for NQDC. The Deferral Choices Comparison Calculator helps employees, executives, or their advisors with the crucial analysis of whether it is better to defer compensation or receive it now and invest it.
In a clear, flexible, and intuitive presentation, the tool shows the potentially important difference between:
(1) deferring compensation, putting it into investments available through a nonqualified deferred compensation account, and receiving taxable distributions in the future; and(2) taking the compensation now, paying taxes on it, and putting the net into investments or a brokerage account.
People who use the tool see results in both an easy-to-understand graph and a table with numerical figures. Users have the ability to adjust all variables, including:
- length of deferral or investment
- rate of return on the investments, whether in a deferred compensation account or in a brokerage account
- federal and state tax rates for ordinary income and capital gains, both current and predicted
This calculator is the only publicly available tool of its kind to perform this critical analysis for nonqualified deferred compensation. It can have a broader application too. In addition to helping with the financial planning for NQDC, the calculator works equally well for any other type of tax-deferred savings plan, such as a 401(k) plan or a regular IRA.
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