The Advantages of Deferring Income in an Uncertain Tax Environment
Dallas, Texas (Vocus) August 31, 2010
A new white paper describing Clark Consulting, LLC proprietary research demonstrates that in all but a few scenarios, even if taxes do rise in the years ahead, the accumulated savings that can be achieved by a highly compensated executive over the long-term by deferring income into a nonqualified deferred compensation plan (NQDCP) should result in a larger retirement nest egg.
Entitled “The Advantages of Deferring Income in an Uncertain Tax Environment,” the research pitted NQDCP deferral against the alternative: executives choosing not to defer, paying federal income taxes on their compensation currently, and then depositing the remainder in a taxable personal investment account using typical mutual fund investments.
The exception to the study’s overall finding: If an executive is taxed at the very highest rates and is willing to settle for a 3% return on investments over a ten-year time horizon, better results would be achieved by not deferring. Otherwise, in all other scenarios researched, deferral of compensation—and the federal income taxes on that compensation—results in a larger retirement nest egg.
The Clark Consulting study, an update of research originally conducted in 2009, was prompted by the suggestion in certain articles that, given anticipated changes in federal income tax rates, highly paid executives would do well not to defer income this year due to the comparatively lower marginal tax rates currently in place. Those highly anticipated tax changes and other factors “helped cause a 27% decline in salary deferrals and a 38% decline in bonus deferrals during the 2009 plan year compared to 2008,” according to the Clark Consulting white paper.
The research, which took into account the higher marginal tax rates that may go into effect as of January 1, 2011 upon the expiration of the so-called “Bush tax cuts”, was conducted by white paper authors Steve Broadbent and Chris Nyland, independent consultants of Clark Consulting. The findings are cited in a new thought leadership analysis entitled “Defer Income or Pay Taxes Now?” which concludes that for highly compensated executives the primary consideration should not be their tax bill. Instead, they should focus on whether they are deferring enough income for their retirement years.
“The Advantages of Deferring Income in an Uncertain Tax Environment” white paper and the “Defer Income or Pay the Taxes Now?” thought leadership analysis are available at http://clarkconsulting.com under Resource Library, Articles and White Papers.
About Clark Consulting, LLC:
Clark Consulting, LLC, headquartered in Dallas, is an AEGON company. AEGON N.V. is an international life insurance, pension and investment group based in The Hague, The Netherlands, with businesses in over twenty markets in the Americas, Europe and Asia.
Clark Consulting is a leading source of strategic financing solutions such as bank-owned life insurance (BOLI) and corporate-owned life insurance (COLI) for inefficiently funded and unfunded liabilities that result from executive and employee benefit programs.
Since 1967, Clark Consulting has assisted plan sponsors in implementing thousands of benefit plans and serves as the record keeper for billions in assets for leading American corporations and banks.
Securities products and services are offered through Clark Securities, Inc., DBA CCFS, Inc., in Texas: 2100 Ross Avenue, Suite 2200, Dallas, TX 75201-7906. Phone: 800.999.3125. Member FINRA and SIPC.
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