Deferred Comp Calculator

Deferred Compensation Calculator

Use this calculator to estimate the potential growth and tax benefits of deferring a portion of your compensation.

This is for informational context; the calculator shows total value at payout.

function calculateDeferredComp() { var annualDeferral = parseFloat(document.getElementById("annualDeferral").value); var yearsUntilPayout = parseFloat(document.getElementById("yearsUntilPayout").value); var annualGrowthRate = parseFloat(document.getElementById("annualGrowthRate").value) / 100; var currentTaxRate = parseFloat(document.getElementById("currentTaxRate").value) / 100; var expectedPayoutTaxRate = parseFloat(document.getElementById("expectedPayoutTaxRate").value) / 100; var payoutPeriodYears = parseFloat(document.getElementById("payoutPeriodYears").value); // Not directly used in core calculation, but good to capture. var resultsDiv = document.getElementById("deferredCompResults"); resultsDiv.innerHTML = ""; // Clear previous results // Input validation if (isNaN(annualDeferral) || annualDeferral <= 0 || isNaN(yearsUntilPayout) || yearsUntilPayout <= 0 || isNaN(annualGrowthRate) || annualGrowthRate < 0 || isNaN(currentTaxRate) || currentTaxRate 1 || isNaN(expectedPayoutTaxRate) || expectedPayoutTaxRate 1 || isNaN(payoutPeriodYears) || payoutPeriodYears <= 0) { resultsDiv.innerHTML = "Please enter valid positive numbers for all fields. Tax rates should be between 0 and 100."; return; } // Helper function for Future Value of an Annuity function calculateFVA(pmt, rate, nper) { if (rate === 0) { return pmt * nper; } return pmt * ((Math.pow(1 + rate, nper) – 1) / rate); } // 1. Total Contributions var totalContributions = annualDeferral * yearsUntilPayout; // 2. Total Value at Payout (Pre-Tax) – if deferred var totalValueAtPayoutPreTax = calculateFVA(annualDeferral, annualGrowthRate, yearsUntilPayout); // 3. Total Tax Paid at Payout var totalTaxPaidAtPayout = totalValueAtPayoutPreTax * expectedPayoutTaxRate; // 4. Net Payout After Tax – if deferred var netPayoutAfterTaxDeferred = totalValueAtPayoutPreTax – totalTaxPaidAtPayout; // 5. Hypothetical Net Value if NOT Deferred (and taxed now, then invested) // This assumes you pay taxes on the deferred amount immediately, then invest the net amount. // For simplicity in comparison, we assume this after-tax investment also grows tax-free at the same rate. var annualAfterTaxInvestment = annualDeferral * (1 – currentTaxRate); var hypotheticalNetValueNotDeferred = calculateFVA(annualAfterTaxInvestment, annualGrowthRate, yearsUntilPayout); // 6. Benefit of Deferral var benefitOfDeferral = netPayoutAfterTaxDeferred – hypotheticalNetValueNotDeferred; // Display Results var output = "

Calculation Results:

"; output += "Total Contributions: $" + totalContributions.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Total Value at Payout (Pre-Tax): $" + totalValueAtPayoutPreTax.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Total Tax Paid at Payout: $" + totalTaxPaidAtPayout.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Net Payout After Tax (Deferred Comp): $" + netPayoutAfterTaxDeferred.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Hypothetical Net Value if NOT Deferred (and invested after-tax): $" + hypotheticalNetValueNotDeferred.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Estimated Benefit of Deferral: $" + benefitOfDeferral.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + ""; output += "Note: The 'Hypothetical Net Value if NOT Deferred' assumes you pay taxes on the deferred amount immediately and then invest the net amount, with its growth also being tax-free for comparison purposes. Actual tax treatment of non-deferred investments can vary."; resultsDiv.innerHTML = output; }

Understanding Deferred Compensation

Deferred compensation is a non-qualified retirement plan that allows highly compensated employees to defer a portion of their current income (salary, bonuses, commissions) until a future date, typically retirement or separation from the company. Unlike qualified plans like 401(k)s, non-qualified plans are not subject to the same strict IRS contribution limits or non-discrimination rules, making them a valuable tool for executives and key employees.

How Deferred Compensation Works

When you elect to defer compensation, that portion of your income is not immediately subject to federal or state income taxes. Instead, the money is set aside by your employer and often invested according to your choices (though the assets remain subject to the claims of the company's general creditors). The key benefits are:

• Tax Deferral: You don't pay income tax on the deferred amount or its earnings until you actually receive the payout. This allows your money to grow tax-deferred, potentially accumulating more over time.
• Tax Rate Arbitrage: The primary goal is often to shift income from a high-earning year (when your marginal tax rate is high) to a future year (e.g., retirement) when you anticipate being in a lower tax bracket. This can result in significant tax savings.
• Supplemental Retirement Income: It provides an additional source of income in retirement, beyond what qualified plans can offer.

Who Benefits from Deferred Compensation?

Deferred compensation plans are most beneficial for:

• High-Income Earners: Individuals who consistently hit or exceed the contribution limits for 401(k)s and other qualified plans.
• Those Expecting Lower Future Tax Rates: If you anticipate being in a lower tax bracket in retirement, deferring income can lead to substantial tax savings.
• Employees Seeking Additional Retirement Savings: It's a way to save more for retirement than traditional plans allow.

Key Considerations

• Company Risk: Deferred compensation plans are "non-qualified," meaning the deferred funds are typically held as an unsecured promise by your employer. If the company goes bankrupt, you could lose your deferred compensation.
• Payout Elections: You usually must elect your payout schedule (e.g., lump sum, installments over 5 or 10 years) well in advance. These elections are generally irrevocable once made.
• Tax Rate Uncertainty: While you might expect lower tax rates in retirement, future tax laws can change.
• Vesting Schedules: Some plans may have vesting schedules, meaning you only get to keep the deferred compensation if you remain with the company for a certain period.

How to Use the Calculator

Our Deferred Compensation Calculator helps you visualize the potential financial impact of deferring a portion of your income. Here's what each input means:

• Annual Amount to Defer: The dollar amount you plan to defer each year.
• Years Until Payout Begins: The number of years your deferred compensation will grow before you start receiving payments.
• Assumed Annual Investment Growth Rate: The estimated annual return your deferred funds will earn while invested.
• Your Current Marginal Income Tax Rate: Your highest federal and state income tax bracket combined, which you would pay if you took the income now.
• Expected Marginal Income Tax Rate at Payout: Your anticipated highest federal and state income tax bracket when you begin receiving your deferred compensation.
• Payout Period (Years): The number of years over which you elect to receive your deferred compensation (e.g., 1 for lump sum, 5, 10). While this input doesn't directly affect the total value calculation, it's crucial for your personal planning.

The calculator will show you the total contributions, the pre-tax value at payout, the estimated tax paid, and your net payout. Crucially, it also provides a comparison to a scenario where you don't defer, highlighting the potential benefit of using a deferred compensation plan.

Example Scenario:

Let's say you defer $20,000 annually for 15 years, expecting a 7% annual growth rate. Your current marginal tax rate is 35%, but you anticipate it will drop to 20% in retirement. The calculator would show:

• Total Contributions: $300,000.00 ($20,000 x 15 years)
• Total Value at Payout (Pre-Tax): Approximately $502,599.00 (due to 7% tax-deferred growth)
• Total Tax Paid at Payout: Approximately $100,519.80 (20% of $502,599.00)
• Net Payout After Tax (Deferred Comp): Approximately $402,079.20
• Hypothetical Net Value if NOT Deferred (and invested after-tax): Approximately $326,689.35 (If you took $20,000, paid 35% tax, invested $13,000 annually at 7% growth)
• Estimated Benefit of Deferral: Approximately $75,389.85

This example illustrates how tax-deferred growth and a lower future tax rate can significantly increase your net wealth compared to taking the income now and investing it after taxes.