Deferred Compensation Plans: When Deferring Makes Sense and When It Doesn’t

Each fall, executives at larger Utah employers get an enrollment email asking how much of next year’s salary and bonus they want to defer. It is a decision made in a short window, often with little guidance, and it shapes income for a decade or more.

What a deferred compensation plan is

A 401(k) is a qualified plan: contributions are limited, assets are held in a trust for your benefit, and the money is protected from your employer’s creditors. A nonqualified deferred compensation plan is the opposite on each point. There is usually no cap on how much you can defer. The money stays on your employer’s books. And if the company goes bankrupt, you are a general unsecured creditor.

In exchange, you get something a 401(k) cannot offer: the ability to move a large amount of income out of a high-tax year and into years you choose. Many plans also credit notional investment returns on the balance, often mirroring the 401(k) menu.

When deferring makes sense

Your bracket will be lower later. Deferring income taxed at the top federal rate today and receiving it in early retirement at a lower rate is a real saving. The spread matters more than any other factor.

You already fill your 401(k). The 401(k) comes first because it is protected and portable. For 2026 the employee limit is $24,500, plus catch-up contributions after 50. If you are not at that limit, start there.

Your employer is strong and likely to stay that way. You are extending credit for years. A large, diversified, investment-grade company is a different risk than a startup or a company in a cyclical industry.

You have a clear use for the payout. A deferral scheduled to pay out over the five years between retirement and Social Security can fund that gap at low tax rates and let your other accounts keep growing. That is a plan, not a guess.

When to say no, or to defer less

You might leave. Many plans pay out in a lump sum at separation. If you change jobs in three years, the entire balance can land in one tax year, which defeats the purpose.

Your employer’s credit is uncertain. No tax saving is worth a meaningful chance of losing the principal.

You have no liquidity. Deferring compensation reduces take-home pay. If you would be borrowing to fund your life while deferring, stop.

State tax is heading the wrong way. Deferred compensation is generally taxed by the state where you live when you receive it, with an exception for payments spread over ten or more years. Deferring in Utah at 4.45 percent and receiving it in a state with no income tax is a bonus. Deferring in a no-tax state and retiring to a high-tax one is the opposite. Utah’s flat rate keeps the state side predictable for most of our clients.

The distribution election is the real decision

When you defer, you choose when and how the money comes back: a lump sum or installments, at a fixed date or at separation. Changing the election later usually requires pushing the payout at least five years further out, and the change must be made well in advance. Most mistakes we see are election mistakes, not deferral mistakes.

The common one: electing a lump sum at separation. An executive retires at 62, receives a seven-figure payout in one year, and pays more tax than if she had never deferred. The better choice for most people is installments over five to fifteen years, timed to fill the low-income years before Social Security and required minimum distributions begin at 73 or 75.

Coordinating the payout with everything else

Deferred compensation does not live in a vacuum. It arrives in the same years as pension payments, Social Security, RMDs and any Roth conversions you want to do. Stacking all of them in the same years pushes you into brackets you were trying to avoid. A good plan lays each income source on a timeline and shifts what can be shifted. Our article on Roth conversions before RMDs shows how the low-income window works.

This is why deferred comp sits inside our executive financial planning rather than being a standalone decision each November. During the Take Inventory step we gather every grant, plan and election you have, then in Plan with Purpose we build the payout schedule around your goals.

Frequently asked questions

Written by Trevor Hanson, Founder | President | Author | Wealth Advisor, RJFS. Last reviewed: October 28, 2026.