The ins and outs of nonqualified deferred compensation

A versatile tool that can help enhance the benefits package you offer your employees.

What is an NQDC plan?

While nonqualified deferred compensation (NQDC) plans can vary slightly from one another, they generally act as an agreement between employers and employees to defer a portion of the employees’ annual income to a future date – that could be one year later or once the employee retires. Deferred compensation isn't counted as earned income, so it's not subject to taxes.

Who does an NQDC plan serve best?

NQDC plans are utilized by companies with a need to recruit, retain and reward key employees. They were created as a counteraction to the cap that high-earning employees face when it comes to government-sponsored retirement plans.

Highly compensated employees are often limited in retirement savings due to federal legislative limits. Participating in an NQDC plan can allow high earners to accrue additional pre-tax savings and tax-deferred growth. Employers can harness the tax deferring benefits of NQDC plans as an incentive to entice and retain top talent.

Nonqualified plans also offer more flexibility than qualified retirement plans in that savings can be accessed before an employee reaches retirement. While NQDCs are a popular component of a retirement planning strategy, deferred compensation can also be used in a variety of other situations: toward education expenses, to cover a home remodel, or even to supplement income during an extended period off from work. That said, nonqualified plans don’t simply function like a savings account. They require the employee to pick the distribution date they will receive their funds in advance. The main benefit here for employers is that it affords the freedom to offer plans to a more specific subset of employees, such as higher earners.

SECURE 2.0 Act changes

The SECURE 2.0 Act is a recent regulatory update designed to encourage more employers to offer retirement plan benefits through practices such as automatically enrolling eligible employees and allowing catch-up contributions, among other measures.

Most highly compensated employees take advantage of catch-up contributions in their qualified retirement plans, but things are about to change.

Starting in 2024, if the employee has income of at least $145,000 for the year, the catch-up contributions under 401(k), 403(b) or governmental 457(b) plans must be treated as a Roth contribution, which is a change to the current pre-tax contribution. That means these funds will be saved as after-tax dollars, no longer reducing taxable income but allowing for tax-free withdrawals in the future. Note that the $145,000 income threshold will also be indexed for inflation in future years.

An NQDC plan gives highly compensated employees the option to defer an unlimited amount of their income on both a pre-tax and tax deferred basis – providing greater flexibility with distributions.

For people with access to a nonqualified deferred compensation plan there’s a bigger question: Is it more beneficial to contribute the catch-up amount to the NQDC plan for the pre-tax deferral or a Roth contribution to the qualified retirement plan? Everyone’s circumstances are different, but a financial advisor can offer guidance.

What can business leaders do to prepare?

Recent legislative changes mean that, for companies and business leaders, now is a great time to review your benefit packages. If an NQDC plan is the right fit for your needs, it’s worth considering implementing one to help highly compensated employees effectively prepare for retirement.

Before you begin to leverage the flexibility NQDC plans offer, it’s important to weigh your options. NQDC plans can be a useful tax deferral tool, but there’s a strong likelihood that employees who qualify have maxed out their employer-sponsored retirement plan contributions. Therefore, offering different investment options from those typically found in a standard retirement plan can diversify employee retirement holdings and differentiate your NQDC plan as an enticing benefit.

Talk to your financial advisor to determine whether the addition of NQDC plan types could be beneficial for your business.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Chicken Saltimbocca with Spinach and Potatoes

SERVES
4 to 6
INGREDIENTS
1 pound chicken cutlets
1 teaspoon dried sage
1 teaspoon kosher salt, divided
1/4 teaspoon freshly ground black pepper
3 teaspoons olive oil, divided
12 ounces small red potatoes, cut into 1/4-inch-thick rounds
1 (6-ounce) bag baby spinach
1 clove garlic, minced
6 thin slices prosciutto
4 ounces fontina cheese, shredded

INSTRUCTIONS
Arrange a rack in the middle of the oven and turn on the broiler to high. Meanwhile, cook the chicken and vegetables.

Pat the chicken with paper towels, then season both sides of the cutlets with the sage, 1/2 teaspoon of the salt, and pepper.

Heat 2 tablespoons of the oil in a 10-inch or larger cast iron skillet over medium-high heat until shimmering. Add the cutlets in a single layer without crowding the pan, working in batches if needed. Sear the chicken until the bottom is browned, 3 to 4 minutes. Flip the cutlets and continue searing until the other side is browned and the chicken is cooked through, 3 to 4 minutes more. Transfer the cooked cutlets to a plate, tent with aluminum foil, and repeat cooking any remaining pieces.

Reduce the heat to medium and add the remaining 1 tablespoon of oil. Add the potatoes, season with the remaining 1/2 teaspoon salt, stir to coat with the oil, and arrange in a single layer. Cook until the bottoms just start to brown, 3 to 4 minutes. Flip with a spatula and continue cooking until lightly browned and tender, about 3 minutes more. Stir in the spinach and garlic and cook until just wilted, about 2 minutes.

Remove the skillet from the heat. Place the chicken on top of the vegetables in a single layer. Top each cutlet with a slice of prosciutto, then sprinkle with the cheese. Broil until the cheese is melted and bubbling, about 1 minute.

https://www.thekitchn.com/recipe-chicken-saltimbocca-with-spinach-and-potatoes-240607

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

From the Desk of Dale Crossley and Evan Shear

On behalf of our entire team, we would like to extend our sincerest gratitude to everyone who attended our 25th anniversary gala event. Our anniversary celebration at the Kennedy Space Center was a night to remember, and we hope that you enjoyed the event as much as we did. It was an absolute pleasure to celebrate such a significant milestone in our company's history with all of you. Seeing so many of our clients and their families come together to celebrate with us was such a joy.

As we reflect on the past 25 years, we are reminded of all the challenges we have faced and the successes we have achieved. We are grateful for the trust you place in us and truly appreciate the opportunity to work with such wonderful clients.  Seeing your success has been one of the most rewarding experiences for us as financial planners.

As we look to the future, we are excited about the opportunities that lie ahead. Our commitment to providing exceptional financial planning services remains unwavering. We will continue to evolve our services to meet the changing needs of our clients and provide the customized financial plans our clients depend on. 

We would also like to take this opportunity to thank our staff for their hard work and dedication to our company. Without their commitment, we would not be where we are today. We appreciate their contributions to our success.

Once again, we want to thank you, our clients, for entrusting us with your financial planning needs. Your continued support and referrals are what drive our business forward. We are honored to be a part of your financial journey and will always strive to exceed your expectations.

We look forward to many more years of working together and achieving financial success.

If you would like to view and download photos from the event, please visit CrossleyShear.com/gala.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All opinions are as of this date and are subject to change without notice. Past performance is not a guarantee of future results.

Hidden benefits of 529 plans

Beyond education savings, these plans can work for you – not just your kids.

Most commonly, 529s are known as a tool to save for college expenses tax-free, but even if you can cover college costs in other ways, don’t overlook how using these plans can benefit you. These investment vehicles can be used as a tax-efficient way to transfer wealth to future generations, reduce your estate taxes, and more.

Consider the goals you want to pursue with your estate and education planning. Do you want to minimize your taxable estate, provide for your loved ones' education, or have flexibility to move the money? Once you know your goals, you can look deeper into your options.

529 plan basics

Costing almost nothing to set up, 529 plans offer several benefits, including tax-advantaged growth, flexibility, and high contribution limits.

Contributions to the plan are made with after-tax dollars, but earnings grow tax free, and withdrawals do, too, if used for qualified education expenses such as tuition, fees, books, and college room and board.

You can use the funds to pay for the education of any eligible family member, and you can change your beneficiary multiple times – so you can move money across generations without incurring taxes (as long as you don’t reach gift tax exclusions).

There’s no federal limit on the amount of money that can be contributed to a 529 plan, and many states offer additional tax benefits for contributions made to their own state's plan. There’s also plenty of flexibility in how the money can be invested.

Scholarships can be used in conjunction with a 529 plan, and funds can be used to toward graduate school or qualified apprenticeship programs to help students learn a trade and start their careers.

The hidden benefits

Much more than a college savings vehicle, 529 plans empower you with additional strategies that can work to your advantage – and help you make the most of your money now and in the future.

• Reduce your taxable estate. Contributions to 529 plans are considered gifts for federal estate tax and state estate tax purposes, meaning you can remove money from your taxable estate by contributing to a 529 plan.
• Roll a 529 plan over into a Roth IRA. Starting 2024, the SECURE 2.0 Act makes it possible to roll over unused 529 plan funds to a Roth IRA when owned by the beneficiary, turning education savings into retirement savings. The 529 plan must be active for more than 15 years, the funds must be in the account for at least five years, and up to $35,000 can be rolled over to the Roth IRA over the account beneficiary’s lifetime (annual contribution limits for IRAs still apply).

After moving unused 529 plan funds to a Roth IRA, you designate yourself as the beneficiary. After this, you can contribute money to the plan and invest it in a variety of investment options. When you retire, you can withdraw the money from the plan tax-free and use it to pay for qualified retirement expenses, such as living expenses, healthcare costs and travel.

• Take control over how your assets are distributed. You can change the beneficiary at any time, giving you control over how your assets are distributed after your death.
• Pay tuition in cash – to the 529 plan. Instead of writing a check to the institution, fund a 529 plan, which could allow you to take a deduction on that amount. Then pay the tuition straight from the plan. You can also fund tuition out of a Uniform Transfers to Minors Act (UTMA) transaction or trust account.
• Save for college expenses for multiple children or grandchildren. Open a single 529 plan and change the beneficiary as needed – making it easier for you to plan your annual contributions and distributions.
• Gift the money to a beneficiary. You can gift up to $17,000 per year per beneficiary (or $34,000 if you’re married) to a 529 plan without incurring gift taxes. This is a good way to help the beneficiary save for college without having to pay taxes on the gift.
• Gift money to family members or friends. A 529 empowers you to gift up to five years' worth of annual gift tax exclusions in a single year without incurring gift taxes, so you could gift up to $85,000 per year per beneficiary or $170,000 per year per beneficiary if you’re married.
• Gift money to a donor advised fund without incurring gift taxes. A donor advised fund is a type of charitable giving account that allows you to make donations to charity and then recommend how the money is used over time.

With these tax-saving options, even if you can afford to pay cash for college doing so may not be in your best interest. Explore your options and consult with your financial advisor or estate planning attorney to uncover which strategy can help you make the most of this tax-advantaged investment vehicle.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Next steps

• Consider what goals you want to pursue with your estate and education planning and if any of these strategies could benefit you and your family.
• Evaluate and compare 529 plans to determine the one that aligns best with your end goals.
• Talk to your financial advisor for perspectives on choosing a 529 plan.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.

The lasting benefit of financial literacy

Key financial lessons to teach your children as they grow.

Talking to kids about money can be awkward, but it’s important. That’s the takeaway from a recent T. Rowe Price survey, which showed that parents consider topics like death and politics easier to discuss with kids than saving for a goal. A full 85% wanted to avoid the issue by signing their kid up for a personal finance course.

Though a class might help – and your advisor can be a valuable teacher’s aide – your kids are still taking their cues from you.

“Parents are the number one influence on their children’s financial behaviors,” Beth Kobliner, author of “Make Your Kid a Money Genius,” told Forbes. “It’s up to us to raise a generation of mindful consumers, investors, savers and givers.”

Here we offer essential financial lessons to teach your kids at each age and stage.

Ages 3-6
Don’t underestimate them – at 3, your kids can grasp basic financial concepts, and by age 7, they have already formed money habits, according to a Cambridge University study. Start with the basics, including the idea that you work to earn money in order to pay for what you want and need – and help your kids understand the difference.

Create a wants vs. needs collage: divide a sheet of paper in half and have your child cut and paste photos from magazines into the two categories.

Other money milestones mapped out by the experts at the Consumer Financial Protection Bureau include the ability to focus and persist through tasks. Saving for retirement takes large amounts of patience and self-control, so we might as well start teaching them early.

Recognizing tradeoffs is another important early milestone. Try thinking aloud when you’re grocery shopping about the amount of money you’re exchanging for a product, or have them help you compare the unit price of similar goods. Whether a trade involves money, treats or time, discuss with your child how every decision has consequences.

Around age 5, it’s important to give kids some cash to manage. A regular allowance allows them to start thinking in terms of financial tradeoffs, and you can offer them a three-part piggy bank (save, spend and share) so they begin to understand the different functions of money.

By age 6, your child should be able to focus on completing small chores to earn money and understand the value of different coins and bills well enough to sort and count them.

Ages 7-12
As your child grows, help them develop values such as empathy and gratitude. Knowing that some families live in poverty and need assistance is part of financial literacy. Using a site like Dollar Street that shows photos of different families around the world living on a variety of incomes can help. So can letting your child have a say in where the family’s charitable dollars will go.

It’s also a good idea to pass down family stories to the next generation – how your parents pitched in to help you build your business, your first big purchase, or how spending habits helped you weather the ups and downs of life. These tales can help them understand their place in the world and develop perspective on what has value in life.

These years are also a good time to have your child open a bank account, which can help them claim the identity as a “saver” and associate positive emotions with it. You should also help them track what they are earning in interest. “There’s nothing like receiving an interest payment (even if it is a few cents) in your name for the first time,” Asheesh Advani, CEO of Junior Achievement Worldwide, told Inc. magazine.

Ages 13-18+
Credit cards, investing, taxes: As your child becomes a young adult, it’s time to step up your game to help them with these complex topics and more. You can help them get started with the SIFMA Foundation’s annual Stock Market Game simulation, let them take control of buying their school supplies on a budget, or help them calculate credit card interest.

Before your teen racks up any credit card debt of their own, consider adding them as an authorized user on your card. Show them that interest accrues unless the balance is paid off – and that any late payment hurts your credit score.

Talk about which data sources can be trusted. Share how you vet financial decisions, and urge your teen to keep digging if what they’re being told doesn’t add up. For example, if your child is researching colleges, encourage them to do research beyond reading a school’s brochure.

Many successful people trace their money skills back to a formative moment: getting a job as a teen. There’s no better way to experience firsthand the effect of taxes, having a boss, being part of a team and managing your time to fit in schoolwork. A seasonal job during school holidays or a part-time gig could help your teen better grasp the working world – and how they picture themselves in it.

Finally, come up with a savings plan for long-term goals, like a car or college tuition. You can use a budgeting app (try Goalsetter or Mint) that helps them visualize their progress, keeps spending in check and gives them a sense of ownership and confidence in their future.

Start the conversation
Whether your kid is 7 or 17, they are ready to hear money talk from their parents and grandparents. After all, financial literacy is not just about dollars and cents. You’re really showing them how to think for themselves, develop values and make sound decisions. In the space of a few teachable moments, you can empower them to take control of their future – a worthy investment.

Sources: T. Rowe Price 2019 Parents, Kids & Money Survey; Forbes; Inc. magazine; CNBC Millionaire Survey; U.S. Consumer Financial Protection Bureau; Sallie Mae’s 2019 Majoring in Money report; mtmfec.org

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.