What is the basic purpose of a non-qualified deferred compensation plan?

What is the basic purpose of a non-qualified deferred compensation plan?

• A. To provide immediate compensation in a lump sum
• B. To defer receipt of compensation until a lower tax bracket is reached
• C. To ensure life insurance coverage for the executive
• D. To allow heirs to receive compensation upon the executive's death

Answer: (B)

The basic purpose of a non-qualified deferred compensation plan is primarily to defer receipt of compensation until a later date, which can often be aligned with a time when the individual may be in a lower tax bracket. This strategy benefits executives by allowing them to postpone taxes on earnings until they withdraw the funds, which is often after retirement or upon separation from service. By doing so, it can potentially lead to tax savings and greater financial flexibility during retirement years. Non-qualified deferred compensation plans are particularly useful for high-income executives whose taxable income may be significantly lower once they stop working or retire. This tax deferral aligns with long-term financial planning goals, making it an attractive option for wealth management.

The basic purpose of a non-qualified deferred compensation plan is primarily to defer receipt of compensation until a later date, which can often be aligned with a time when the individual may be in a lower tax bracket. This strategy benefits executives by allowing them to postpone taxes on earnings until they withdraw the funds, which is often after retirement or upon separation from service. By doing so, it can potentially lead to tax savings and greater financial flexibility during retirement years.

Non-qualified deferred compensation plans are particularly useful for high-income executives whose taxable income may be significantly lower once they stop working or retire. This tax deferral aligns with long-term financial planning goals, making it an attractive option for wealth management.