--- title: How Can a High Earner Reduce Current Income Taxes? Through a Non-Qualified Deferred Compensation Plan. description: A Non-Qualified Deferred Compensation plan is not for every employer or employee, but can be a useful means of deferring a large portion of taxable income and reducing current income taxation, while also attracting and retaining highly skilled personnel. image: https://www.4tfg.com/hubfs/4Thought-Blog_NQDC-Plan.jpg --- [![4thought\_footer-logo.png](https://www.4tfg.com/hs-fs/hubfs/4thought_footer-logo.png?width=335&height=101&name=4thought_footer-logo.png "4thought_footer-logo.png")](https://www.4tfg.com/) - [![4Thought Financial Group](https://www.4tfg.com/hubfs/4thought_footer-logo.png)](https://www.4tfg.com/) [![4Thought Financial Group Compass](https://www.4tfg.com/hubfs/4Though-Compass.png)](https://www.4tfg.com/) - [About 4Thought](https://www.4tfg.com/investment-methodology) - [Our Investment Methodology](https://www.4tfg.com/investment-methodology) - [Management Team](https://www.4tfg.com/management) - [In the Media](https://www.4tfg.com/media) - [Contact](https://www.4tfg.com/contact) - [Services](https://www.4tfg.com/investing) - [Private Individual Investing](https://www.4tfg.com/investing) - [SMAs for RIA /Institutional /Family Office](https://www.4tfg.com/financial-advisors-and-institutions) - [Services for CPAs](https://www.4tfg.com/cpa-investing-services) - [Private Wealth Management](https://www.4tfg.com/wealth-management) - [Retirement Plan Services](https://www.4tfg.com/retirement-plan-services) - [Resources](https://www.4tfg.com/resources) - [Financial News](https://www.4tfg.com/resources) - [Portfolio Review](https://www.4tfg.com/portfolio-review) - [Investment Performance](https://www.4tfg.com/performance-requests) - [CPA Continuing Education](https://www.4tfg.com/cpe-continuing-education) - [FAQs](https://www.4tfg.com/faq) - [FAQs](https://www.4tfg.com/faq) - [Contact](https://www.4tfg.com/contact) - Log In - [Goldman Sachs Accounts](https://custodysolutions.gs.com/client-app) - [Wealth Management](https://wealth.emaplan.com/ema/SignIn?ema) - [Consolidated Reporting](https://client.myadvisorlink.com/auth/users/webportal/4tfg) - [Retirement Plan Services](https://www.4tfg.com/rps-login) - - Log In - [Goldman Sachs Accounts](https://custodysolutions.gs.com/client-app) - [Wealth Management](https://wealth.emaplan.com/ema/SignIn?ema) - [Consolidated Reporting](https://client.myadvisorlink.com/auth/users/webportal/4tfg) - [Retirement Plan Services](https://www.4tfg.com/rps-login) ## 4Thought Investing Resources ## 4Thought Investing Resources [Financial News](https://www.4tfg.com/resources/) [Investment Strategy](https://www.4tfg.com/resources/topic/investment-strategy) [Personal Finance](https://www.4tfg.com/resources/topic/personal-investing) [Business Finance](https://www.4tfg.com/resources/topic/business-finance) [For Professionals](https://www.4tfg.com/resources/topic/financial-professionals)[Compass and Crosshairs](https://www.4tfg.com/resources/topic/compass-and-crosshairs) SUBSCRIBE Subscribe for free tips and articles to help you lead a smarter financial life. [Financial News](https://www.4tfg.com/resources) ,[Investment Strategy](https://www.4tfg.com/resources/topic/investment-strategy) ,[Financial Advisor](https://www.4tfg.com/resources/topic/financial-advisor) ,[Financial News](https://www.4tfg.com/resources/topic/financial-news) # How Can a High Earner Reduce Current Income Taxes? Through a Non-Qualified Deferred Compensation Plan. A Non-Qualified Deferred Compensation plan is not for every employer or employee, but can be a useful means of deferring a large portion of taxable income and reducing current income taxation, while also attracting and retaining highly skilled personnel. \[fa icon="calendar"\] Dec 5, 2018, 12:14:55 PM by [Jesse Mackey](https://www.4tfg.com/resources/author/jesse-mackey) ![How Can a High Earner Reduce Current Income Taxes? Through a Non-Qualified Deferred Compensation Plan.](https://www.4tfg.com/hubfs/4Thought-Blog_NQDC-Plan.jpg) Info Sheet - PDF Download [![](https://www.4tfg.com/hubfs/Collateral/InvestmentMethodology.png "Effective Investment Methodology")](https://www.4tfg.com/hubfs/Collateral/Investment-Methodology.pdf) ### **4Thought Financial Group's Unique Investment Methodology** "In order to achieve life goals, one should diversify at the level of investment method, applying the most effective aspects of multiple, completely divergent methods of investing, and not be dogmatic about using a single method" [View the PDF](https://www.4tfg.com/hubfs/Collateral/Investment-Methodology.pdf) [Save the PDF](https://www.4tfg.com/hubfs/Collateral/Investment-Methodology.pdf.zip) [*Learn more about the 4Thought Financial Group Investment Methodology*](https://www.4tfg.com/investment-methodology) There are a variety of ways for high earners to reduce their current income tax liabilities, but they’re not all as obvious as taking your available deductions and maxing out your [401k contributions.](https://www.4tfg.com/retirement-plan-services) After your 401k contribution has been maxed out for the year, one possible solution to further reduce current taxation is the Non-Qualified Deferred Compensation plan (NQDC). **What Is a Non-Qualified Deferred Compensation (NQDC) Plan?** It’s a formalized promise by an employer to pay an important employee a portion of their income at a predetermined point in the future, instead of paying it to them right now. **Advantages of NQDC Plans** The advantage of the NQDC plan for an employee that has current earnings significantly greater than their annual living expenses is that it avoids the need to pay taxes on the excess income until a prescribed future date. It’s a method of deferring taxable income, but it does not involve taking a tax deduction on the deferred amount, because technically no income has been received at all (until the later date). The employee’s elected income deferral into an NQDC plan has no upper limit like a 401k plan does (this is according to IRS limits, but the employer’s plan may have a maximum contribution to an NQDC), so if the employee has already maxed out their 401k contribution, the NQDC may allow them to defer an unlimited amount above and beyond the 401k contribution limits each year. The date to receive the income must be specified in advance by the employee (within IRS rules and any limitations imposed by the employer’s plan) in order to avoid current taxation (this is known as the “Doctrine of Constructive Receipt”). The future date is usually the employee’s planned retirement date. **Disadvantages** A main disadvantage for the employee is that once they have chosen their predetermined future date to receive the income, there is no chance to get that money out in whole or in part on a prior date, nor is there any ability to take a loan from the plan for short-term use purposes like there is in a 401k plan. So any deferral to an NQDC plan should be done with a degree of certainty that the income will not be needed in the interim period. Furthermore, and importantly, once the deferral election has been made, the NQDC participant has effectively subjected their future income to the credit or guarantee of the employer. This means that if the company goes out of business in the interim period, the employee may never receive the promised future income (nor is funding for the plan protected from the company’s creditors). Still, for some high-income earners, this risk is worth taking in order to potentially substantially reduce their current income tax bill. **NQDC Plans Benefit Employers, Too.** There are significant advantages to the NQDC plan for employers, also. Offering the benefit is a way for the employer to attract and retain important personnel and to compete for new high-level talent. It’s a form of so-called “golden handcuffs.” If your employer has a Non-Qualified Deferred Comp plan and you are eligible to contribute to it, this probably means that your employer thinks you’re a very important part of the organization. Your employer does not have to offer this plan to everyone. Under the law, they have the ability to discriminate as to exactly which individuals or groups of employees they want to offer this benefit (unlike with a “Qualified Plan” such as a 401k, Profit Sharing, or Defined Benefit Plan—each of which has strictly regulated predetermined rules as to which employees get access and how much must be contributed by the employer for each participant). A downside for employers is that they have to come up with a way to fund and account for the future liability of the income payment to the employee. But there is some flexibility in terms of how the “promise” can be structured for the individual important “key” employees and in terms of what can be used as the employer’s funding vehicle to make good on the promise of future income to the employee. **Corporate NQDC Plans** In large plans, the investment allocation decision may be left to the individual employee within the limits imposed by the plan. Large corporate NQDC plans often offer a mutual fund-based [selection of investment vehicles](https://www.4tfg.com/resources/different-types-of-financial-planning-services) selectable by each deferring employee participant, which determines how their allocation of deferred income (which is technically still the company’s asset) may grow during the period before receipt. Alternatively, if the employer compensates employees with shares of company stock (often in the form of “Restricted Stock Units” or RSUs), the employee may have the option of deferring the receipt of these stock shares into the NQDC plan, thereby avoiding the immediate income taxation of the shares that would otherwise normally take place when the RSUs become vested. For C-level executives and other upper management employees who often receive a high proportion of their total annual income as stock shares, this is potentially a valuable alternative means of reducing current income taxation. Depending on the plan, the employee may also be able to first defer the RSU income, and then sell the company stock and [reinvest](https://www.4tfg.com/investing) it in a [more diversified](https://www.4tfg.com/resources/how-a-diversified-investment-advisor-can-help-you) mutual fund portfolio within the NQDC plan, thereby reducing their concentrated portfolio exposure to a single company stock while simultaneously taking advantage of lower current taxation. **NQDC Plans for Small Businesses** While many large publicly listed corporations often offer NQDC plans for a select group of upper level employees and officers, there are potentially even greater benefits to the employer for small privately held companies. One funding vehicle sometimes used with smaller companies to compensate key personnel is life insurance. Such personnel are often officers and major shareholders of the company. By purchasing a permanent life insurance contract such as “whole life” on the life of a very important employee, a small corporation can potentially kill two birds with one stone. The corporation is named as the owner and beneficiary of the policy. This effectively creates “key man” life insurance (and the associated death benefit) that will allow the company to hire a new highly skilled employee in the event of the death of the current “key man.” During the employee’s lifetime, the whole life insurance policy will build up cash value, which can be used to provide the deferred compensation to the employee in a lump sum in the future (if the employee doesn’t die) at their predetermined receipt date. Alternatively, using this funding vehicle, the promise of income to the employee can be structured to equate to: “We’ll pay you an income of $X starting X years in the future, and if you die, we’ll still continue to pay your spouse or beneficiaries for at least X years.” Such a promise is not too different from a conventional pension. In either situation the employee never actually owns the life insurance policy at all, but the employing company uses it as a vehicle to fund the known future liability (the promised income payment to the employee). **Is a NQDC Plan Right for You?** While the Non-Qualified Deferred Compensation plan is not for every employer or employee, it can be very useful as a means to defer a large portion of taxable income and reduce current income taxation, as well as to attract and retain highly skilled personnel. If you believe this may be right for you, be sure to consult on the details of your situation and the tax ramifications with your [financial advisor](https://www.4tfg.com/resources/finding-your-financial-advisor) and your accountant before proceeding. ### [**4Thought Financial Group**](https://www.4tfg.com/resources/4thought-financial-group-wealth-management-and-investment-methodology-overview) Are you a high earner looking for ways to reduce your income taxes or an employer looking for a way to provide [retirement benefits](https://www.4tfg.com/resources/if-your-retirement-plan-is-out-of-date-or-in-non-compliance-you-are-at-risk) only to key employees? A Non-Qualified Deferred Compensation Plan is one potential solution. 4Thought Financial Group can help you determine if this makes sense for you. Contact Us here. [![Contact Us](https://no-cache.hubspot.com/cta/default/2201374/4a0854da-f418-4296-8ae4-db3ef0bd9f52.png)](https://cta-redirect.hubspot.com/cta/redirect/2201374/4a0854da-f418-4296-8ae4-db3ef0bd9f52) ### Author: Jesse Mackey ![](https://www.4tfg.com/hubfs/Email/JesseMackey-EmailSignature.png) [mailto:jmackey@4tfg.com](mailto:jmackey@4tfg.com) Jesse Mackey is the Chief Investment Officer of 4Thought Financial Group, an SEC Registered Investment Adviser (RIA). As head of the firm's portfolio management operations, he provides investment planning and portfolio management expertise to aid affiliated financial advisors and partner firms in servicing their clients. He is also director of the economic theory, research, and publishing conducted at the firm. Jesse earned his MBA from Thunderbird School of Global Management in International Securities Investment, International Development and Entrepreneurship, and his Bachelor’s degree from Colgate University in Economics. He has more than 16 years of experience in the financial services industry. He holds the Series 66 Securities/Advisory license, and is also a licensed life and health insurance representative in several states. [More from this author](https://www.4tfg.com/resources/author/jesse-mackey) ## Was this article helpful to you? ### Subscribe to our newsletter for free tips and articles to help you lead a smarter financial life. ### Related posts [![Bear, Bull, Wolf & Eagle: The Markets Reimagined & Redefined](https://www.4tfg.com/hubfs/Bear_Bull_Wolf_Eagle-The_Markets_Redefined.jpg)](https://www.4tfg.com/resources/bear-bull-wolf-eagle-markets-reimagined-redefined) [![Calvin Vu Awarded CFA Designation](https://www.4tfg.com/hubfs/4Thought-Calvin_Vu_Awarded_CFA_Designation.jpg)](https://www.4tfg.com/resources/calvin-vu-awarded-cfa-designation) [![CPA Continuing Education Course: Business Continuity Case Study](https://www.4tfg.com/hubfs/Blog/CPE-Promo-Image-201119.jpg)](https://www.4tfg.com/resources/cpa-cpe-continuing-education-business-continuity-case-study) ## Leave a Comment ### Search 4tfg.com This is a search field with an auto-suggest feature attached. - There are no suggestions because the search field is empty. ### **What Type of Investor Are You?** You have unique investment goals. 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The GIPS firm definition excludes any third party asset management programs over which 4Thought maintains oversight advisory agreements on behalf of its clients, any arrangements under which 4Thought provides recommendations for client self-implementation, and any assets under advisory but not under direct management (in which 4Thought provides allocation changes or trading signals to third party firms but does not take discretion over the trading of client accounts). GIPS-compliant performance information for 4Thought's strategies may be obtained by email at [info@4tfg.com](mailto:info@4tfg.com); on the 4Thought website at [www.4tfg.com/performance-requests](https://www.4tfg.com/performance-requests); or by phone at (516) 300-1617. Disclaimer [Form CRS, Firm Brochure (ADV Part2), Privacy Policy Notice, and Wrap Fee Program Brochure](https://www.4tfg.com/hubfs/Firm_Brochure_ADV_Pt2-Privacy_Policy-Wrap_Fee_Program_Brochure.pdf) [Disclosure](https://www.4tfg.com/disclosure) [BrokerCheck](http://brokercheck.finra.org/) Investment Advisory Services are offered through 4Thought Financial Group Inc., an SEC Registered Investment Adviser. Registration does not imply a certain level of skill or training. The content presented here is for informational purposes only and does not constitute a complete description of our investment advisory services or performance. This website is in no way a solicitation or offer to sell securities or investment advisory services except, where applicable, in states where we are registered (or notice filed) or where an exemption or exclusion from such registration exists. Information throughout this site, including, but not limited to, stock quotes, charts, articles or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY LINKED WEBSITE. Any opinions presented here are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. \*4Thought Financial Group claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. The GIPS firm definition excludes any third party asset management programs over which 4Thought maintains oversight advisory agreements on behalf of its clients, any arrangements under which 4Thought provides recommendations for client self-implementation, and any assets under advisory but not under direct management (in which 4Thought provides allocation changes or trading signals to third party firms but does not take discretion over the trading of client accounts). GIPS-compliant performance information for 4Thought's strategies may be obtained by email at [info@4tfg.com](mailto:info@4tfg.com); on the 4Thought website at [https://www.4tfg.com/performance-requests](https://www.4tfg.com/performance-requests); or by phone at (516) 300-1617. ```json { "@context" : "http://schema.org", "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "", "addressLocality" : "Syosset", "addressRegion" : "New York", "postalCode" : "11791", "streetAddress" : "6851 Jericho Turnpike Suite 120" }, "alternateName" : "4 Thought Financial Group", "areaServed" : { "@type" : "GeoCircle", "geoMidpoint" : { "latitude" : "+40.8100713", "longitude" : "-73.5172286" }, "geoRadius" : "150 km" }, "description" : "A Non-Qualified Deferred Compensation plan is not for every employer or employee, but can be a useful means of deferring a large portion of taxable income and reducing current income taxation, while also attracting and retaining highly skilled personnel.", "email" : "[GDelorenzo@ClearHorizonGroup.Com, info@4tfg.com, no-reply@4tfg.com]", "image" : "https://www.4tfg.com/hubfs/4Thought-Financial-Group-OG.jpg", "logo" : "http://cdn2.hubspot.net/hubfs/2201374/4thought_header-logo.png", "naics" : "523920", "name" : "4Thought Financial Group", "sameAs" : [ "https://www.facebook.com/4ThoughtFinancialGroup", "https://www.linkedin.com/company/3043702", "https://www.youtube.com/channel/UCEHRK-25mAwfTlNzdvFSN3g", "http://investment-advisors.credio.com/l/39493/4thought-Financial-Group-Inc" ], "telephone" : "516-300-1617", "url" : "http://www.4tfg.com" } ``` ```json { "@context" : "http://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Organization", "name" : "Jesse Mackey" }, "dateModified" : "December 6, 2018, 4:23:36 PM", "datePublished" : "2018-12-05 17:14:55", "description" : "A Non-Qualified Deferred Compensation plan is not for every employer or employee, but can be a useful means of deferring a large portion of taxable income and reducing current income taxation, while also attracting and retaining highly skilled personnel.", "headline" : "How Can a High Earner Reduce Current Income Taxes? 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