Nonqualified deferred compensation learning center 457

Nonqualified deferred compensation learning center

A nonqualified deferred compensation (NQDC) plan is a special benefit that gives key employees like you more control over your taxes, retirement income strategy, and investments. Check out a variety of resources designed to help you make informed decisions about participating in a plan and maximizing the benefit.

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NQDC education videos

Explore videos that quickly get you up to speed on all things deferred comp—including how it could help you manage your taxes, what to expect when you enroll in a plan, and more.

 

NQDC basics

How can the NQDC plan work for you?

We all have different needs and unique expectations for retirement. Traditional retirement savings accounts work well for many people, but the contribution limit can create a savings gap, depending on your retirement needs.

A deferred comp plan can help you solve for that by bridging the gap between the income earned while you’re working and other retirement income that’s still growing or isn’t available yet, like Social Security.

With a nonqualified deferred comp plan, you can:

  • Grow your savings.
    Pre-tax deferrals result in tax-deferred growth, allowing compounded earnings to help you save more.

  • Manage your taxes.
    Deferring a portion of your compensation reduces your taxable income. And you’ll have more control over how and when you pay taxes on what you saved.

  • Supplement and diversify your retirement savings.
    Deferred comp plans allow to you save more than the contribution limits of qualified plans, such as a 401(k).

Is a NQDC plan the right fit?

A deferred comp plan is a long-term financial tool you can use as one element of your retirement strategy. If you’re interested in saving more, managing your tax bill, or retiring early, this plan could be for you.

Before participating in the deferred comp plan, make sure you're making the most your organization's 401(k) plan. Once you've contributed all you can to the 401(k) plan, participating in a deferred comp plan may make sense as a way to continue to supplement your retirement income. 457(b) plans have a special catch-up provision, allowing you to potentially make additional catch-up contributions during the three years prior to the plan’s normal retirement age. Unlike qualified plans and governmental 457(b) plans, it isn't based on the age 50 catch-up or a present amount.

Check out this FAQ for common questions participants ask prior to deciding to enroll.

What are the tax implications?

Knowing the impact of taxes can help you determine how much of your income to defer. With an NQDC plan, you’re setting aside money before taxes come out (pre-tax), and the earnings on those dollars compound on a tax-deferred basis. That means more of your money is working for you.

This advantage increases dramatically the longer you let your balance grow. Also, by strategically timing when you pay taxes, you may find you’re able to lower your tax bracket in your retirement years. Keep in mind that distributions from a nonqualified deferred comp plan are treated as ordinary income, and subject to current federal and state income tax.

Maximize your plan

Reach your retirement goals.

For employees like you, it may be a challenge to meet your retirement goals by solely relying on Social Security and 401(k) plans. Participating in your employer’s deferred comp plan can help you supplement your retirement income.

These tools and resources can help you make decisions to get the most out of your plan:

Invest the money you defer.

Through the deferred compensation plan, you can direct deferrals to a variety of reference investment options. Each investment option offers a different level of risk and potential return. That means you can make choices that complement your overall financial strategy.

Take a quiz (PDF) to assess your comfort level with investment risk.

Protect your loved ones.

When you enroll in your organization’s nonqualified deferred compensation plan, you’ll designate one or more beneficiaries. They’ll receive the money from the plan. Who you select is legally binding and overrides your will, so it’s important to keep your beneficiaries updated so the money in your account will be distributed the way you want.

You can review or change your beneficiaries anytime by logging in to your nonqualified account on principal.com.

Anticipating a distribution

What events trigger a distribution?

During enrollment, you’ll designate how you want to receive your money from the deferred comp plan. You’ll want to ask yourself:

  • What goals or milestones do I want to save for?
  • When will I need the money to ensure I can fund those goals?
  • Do I want a lump sum payout or installment payments?

Distributions can be triggered by events that are:

  • Within your control, like leaving an employer for a new job or due to retirement.

  • Out of your control, such as a death, disability, change in the company’s control, or financial hardship.

What happens if you leave your employer?

Generally, you will receive your distribution(s) within 60 days after leaving your employer. If you would like to defer your distribution to a later date, and your plan allows it, you will need to provide written notice to your employer.

If you leave to work for another not-for-profit entity that offers a non-governmental NQ 457(b) plan that accepts transfers you could transfer your balance to the new employer’s 457(b) plan.

FAQs: Unplanned early distributions

Have questions about unplanned early distributions from the nonqualified deferred comp plan? Check out the answers to these frequently asked questions.

How much should I expect?

Log in to principal.com and click on “Distributions” to view your distribution summary. Just enter the date you’ll leave your employer and get an estimate of your distribution payment.
When can I expect my payment?

Upon enrolling in the plan, you made an election to have your account balance distributed upon death, disability or separation from service. These options are generally a single lump sum or limited duration annual installments. Payments generally begin within 60 days following the distributable event.

If your employer issues payment, contact your human resources representative to get a date. If your check is issued by Principal, you can expect payment to be made within 7-10 business days following distribution date. If you are not sure who is issuing the payment call Principal.
When am I taxed on the distribution from my nonqualified deferred compensation account?

When you receive a distribution, upon attaining a qualifying distribution event as defined by your plan, you will have to pay federal income taxes on the distribution amount. The impact of state and local taxes is complex. Consult with your tax advisor to understand how much, if any, state tax you will incur, and which state tax laws are applicable to your distribution. (Note: Depending on the timing of the distribution, you may be taxed either under the laws of the state you worked in or the state where you receive your distribution, or both.)
How do I offset tax implications?

Rollovers to other tax deferred plans are not permitted. If your new employer has a NQDC plan, there might be some strategies for you to consider. Ask your financial professional about potential strategies.
What should I discuss with my financial professional?

Receiving additional income that is taxed as ordinary income may have some implications. Regardless of the payout schedule a financial professional could help with strategies on how to ensure you’re planning appropriately for your payout.
How do I change my payout?

Some plans allow for changes to the frequency or method of payment. 457(b) plans are required to specify a default payment time and form relative to an event—for example, a lump-sum payment 60 days following the participant’s separation. While 401(k) and 403(b) plans generally require participant action to distribute balances, 457(b) plans are the opposite and require participant action to delay payment.

Approaching retirement

If you’re thinking about retiring, check out this guide (PDF) which outlines important considerations on when to make your move.

FAQs: Planned distributions

Have more questions on distributions from the nonqualified deferred comp plan at retirement? Check out the answers to these frequently asked questions.

How much will I receive from my NQDC plan at retirement?

Distributions are selected when you enroll or re-enroll in the plan. Log in to and click on scheduled Distributions to view how your distributions are set up.
When and how can I expect my payment?

If your check is issued by Principal, you can expect payment to be made within 7-10 business days following distribution date. If you are choosing direct deposit, make sure your updated account information is entered (here)-link to update account.
What do I do about my health insurance?

Staying healthy plays a big role in helping you make the most of your retirement years. That’s why working health care costs into your retirement budget is important.
When should I start receiving Social Security?

Timing is everything when it comes to planning for retirement. This Social Security Q&A (PDF) can help answer your questions.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment, or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment, or accounting obligations and requirements.

Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC, and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.

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