By Joseph R. Crea, CLU, ChFC
We’ve all felt the impact of the difficult economy over the last few years. While some impacts receive a lot of media attention – the struggling housing market, high jobless rates, etc. – others are less obvious, but can still dramatically affect our financial security.
For example, the economic climate, along with increasing federal deficits, has lead to a number of tax law changes that increase our effective tax rates including:
• Medicare contribution taxes on unearned income
• Increased hospital insurance tax
• Lower Health FSA limits
• Increases to earned and investment tax for filers over $250,000 household, $200,00 single
Nonqualified Deferred Compensation Plans (NDCPs) are an excellent way for executives and business owners to mitigate the effect of these increases while, at the same time, building long-term savings.
The Nonqualified Deferred Compensation Advantage
Nonqualified Deferred Compensation Plans provide participants with a tax deferred investment and accumulation opportunity that is not limited by qualified plan rules. Deferring taxes on the original investment and earnings until payout can generate substantially greater earnings than a similar outside taxable investment.
Of course, taxes are payable at ordinary income rates upon distribution. However, the advantage of tax-deferred accumulation still results in a better investment, even if the individual’s tax rate is higher at payout. For example, assume an executive invests $50,000 investment in an NDCP and another $50,000 in a comparable outside taxable investment. Also assume the executive has a 45% tax rate at the time of investment and a 50% tax rate at the time of distribution. After 25 years of 6% earnings, the lump sum value of the NDCP account is approximately double the fully taxed outside investment balance.
Call BRG Today
Nonqualified Deferred Compensation Plans can provide your executives and business owners with a powerful tool to accumulate long term savings and battle the effects of rising taxes. Contact BRG today to discuss plan options that meet the needs of your organzization.
Joe Crea is the President and co-founder of Benefits Resource Group. He manages the development of leading edge solutions and services for BRG clients. You can contact Joe by phone at 216-393-1818 or by email at jcrea@benefitsrg.com.
Securities and Investment Advisory Services Offered through M Holdings Securities, Inc., A Registered Broker/Dealer, Member FINRA/SIPC; BRG is independently owned and operated; This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor; Product guarantees are subject to the claims paying ability of the issuing insurance company; Variable life insurance products are long-term investments and may not be suitable for all investors. An investment in variable life insurance is subject to fluctuating values of the underlying investment options and entails risk, including the possible loss of principal. The performance of your account will vary and you may receive more or less than the amount invested.
