Here’s some of what we discuss in this episode:
🧾 Know the fine print – Rules on payout timing are strict and often irreversible.
⚠️ Watch for triggers – Job changes or company buyouts can force unexpected distributions.
📉 Subject to credit risk – If your employer fails, you could lose your deferred comp.
📊 Plan your income – Coordinate payouts with your tax strategy to reduce the hit.
💡 Advanced tools – Strategies like TALS can help offset large taxable events.
Listen Now:
The Smart Take:
You’ll also learn about new planning opportunities, including tax‑aware long‑short strategies that can help offset deferred comp income with substantial tax savings. If you have a deferred compensation plan — or work in healthcare where these plans are common — this episode will give you the tools to make smarter decisions and avoid costly surprises.
0:00 – Intro & background on this topic
5:20 – What a Deferred Compensation Plan is
8:43 – The benefits
9:20 – Where problems arise
17:38 – Planning opportunities
21:00 – Tax Aware Long Short (TALS)
Part 1: The Long and Short on Tax-Aware, Long-Short (TALS) Investing
Part 2: The Long and Short on Tax-Aware, Long-Short (TALS) Investing
Part 3: The Long and Short on Tax-Aware, Long-Short (TALS) Investing
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
Today we’re talking about deferred compensation plans and how they can be a great deal. But far too often, the fine print catch executives and physicians off guard. Today, we unpack how to use these plans in 2025, the benefits they offer, and the risks you should be watching out for, all coming up on Retire Smarter.
Walter Storholt:
Welcome to another edition of Retire Smarter. I’m Walter Storholt, alongside as always, Tyler Emrick, a certified financial planner as well as a chartered financial analyst, and of course one of the wealth advisors at True Wealth Design based in northeast Ohio, but serving clients all across the country as well.
Tyler, good to be with you again this week and a little bit of a… Is this a break from the Big Beautiful Bill conversations that we get to kind of step back a little bit here?
Tyler Emrick:
It is. It is a little bit of a break from the One Big Beautiful Bill. So we get talk a little bit about deferred compensation plans, but how’s it going for you, Walt?
Walter Storholt:
Yeah, things are good. Just got done with travel to the beach and then one day later traveled back to the East coast to visit my grandparents and parents in Maine. It was their 70th wedding anniversary, so it was a really fun get together.
Tyler Emrick:
No, that’s a good one. That’s a good one.
Walter Storholt:
Yeah. Not many people make it to that level these days, I don’t think.
Tyler Emrick:
No, not at all. And when you first said it, I was like, “Oh, they made it to 70.” But no, you’re saying 70th wedding anniversary [inaudible 00:01:30].
Walter Storholt:
70th wedding anniversary.
Tyler Emrick:
It’s awesome.
Walter Storholt:
Yeah, if you can believe it. So it was fun hearing their memories of their wedding day and what they did and just some of those stories of what their honeymoon looked like then. And it was just neat walking down memory lane.
Tyler Emrick:
Oh, they got to love going to weddings, right? Because when they do the dance and the last one standing, they’ve got to be taking home the gold on every one of those.
Walter Storholt:
Well, when we got married over 10 years ago. We did kind of an honoring of like, “Okay, anyone that’s been married a year stand up. Five years, 10 years, 20.” And they were definitely the last ones still standing at that point.
Tyler Emrick:
Sure. No, that’s awesome. Now I’m sure they love that.
Walter Storholt:
Yep. Well, deferred compensation in 2025, it sounds like things have changed perhaps?
Tyler Emrick:
Yeah, well not necessarily changed, but these plans are certainly becoming more and more common over the years. The PSCA, which is like the Plan Sponsor Council of America, they’re a nonprofit, they do a lot of work with employers on these type of plans and education around them. I mean, only around maybe 10% of employees have access to these types of plans. But those individuals that do have access to them find them extremely beneficial. I think as high as maybe 60 to 70% of individuals that are eligible for them actually utilize them, which is great, but certainly they can come with some fine print and some quirkiness above and beyond your traditional, say, 401(k) plan, 403(b) plan.
A lot of the research that’s done on these, the same non-profit said that when they interview executives, a lot of them, almost a-third of them, still have issues kind of understanding like, “Well, how do they work? What are some of the rules that are followed?” And certainly have quite a bit of questions around them. So I figured today we can kind of dive into them a little bit. And if you have access to one of these, kind of really paint the picture of, well, what decisions are ahead of you and what do you need to be thinking about. If you don’t utilize them the right way or get a surprise from them, it can be pretty detrimental. I mean, you put money in these plans over a number of years just like you do with a 401(k) or 403(b), and you build up a sum of money and then all of a sudden your employer can come to you and be like, “Well hey, you got to cash those out.”
“What? I got to take a half a million dollar hit from a tax standpoint?” Which we will get to a little bit later on in the podcast today with some of the hospital systems are one specifically in Northeast Ohio here that might be facing one of those. So they can be quirky.
And not only that, but you just think about what these plans can be called. I’m calling them deferred compensation plans, but when you get down to it, Walt, I mean they can be called non-qualified deferred compensation plans, executive deferral compensation plans, ERP, SRP, 457(b), 457(f). I don’t know. I could pretty much rattle on and on of what these things can be, and that probably goes down to some of the unique nature of how they fit in and how the employers are using them.
Walter Storholt:
We’ve certainly delved deeply into certain plans on this show in the past, and I think you named a few letters and number combinations there I hadn’t heard of yet, so.
Tyler Emrick:
All right, fair enough.
Walter Storholt:
Okay.
Tyler Emrick:
Well, we’ll dive into it a little bit.
Walter Storholt:
I almost had to do the old egghead alert on you just for [inaudible 00:05:09] so many of those numbers and letters, man.
Tyler Emrick:
I had to get a few of them in, Walt, just in case some of the listeners out there like, “Well, hey, does this apply to me or not?”
Walter Storholt:
Yeah, but that’s helpful, right?
Tyler Emrick:
“I have a 457 and 457(f). Wait, what is it?” So you might not think these would be available to you, but hopefully one of those might triggered like, “Oh wait, do I have access to one of these?” For sure.
And a quick high level on them, I mean they are very different than traditional retirement plans that probably come to mind, right? You think about your 401(k) or for those individuals that work for maybe a nonprofit, they might be putting money into a 403(b) account.
These traditional retirement plans have limits on how much you can contribute to them each year, okay? The non-qualified deferred compensation plans are very similar to that, but some individuals that have a good income coming in might want to say, “Hey, I’ve maxed out my 401(k). I’ve maxed out my 403(b), I’m looking for some help here in some other places where I can put my money to lower my taxes.” And that’s where these deferred compensation plans come in where employers will go in and say, “All right. Hey, we’ve got a solution for you. Utilize this plan after you’ve maxed out your 401(k) or 403(b), and then you can defer more of your income in here to have them pay out at a later time.”
But just as anything, well like the good old IRS, they’re going to get their hands on a piece of it at some point. So when you do put money into these, you get a deduction for them. But at some point down the road when they cash out, you got to pay taxes on them. And that’s where the planning and some of the quirkiness comes into play because when you think about the rules you have to follow when it comes time to cash these out, they are very strict.
Very different than your traditional retirement plans where when you retire, maybe you roll them over to an IRA and you can spread out distributions over a long period of time. Maybe you don’t do distributions from your 401(k) When you retire. These deferred comp plans, you actually have to elect how you want to get those monies, when those monies are going to come to you, and are they going to be spread out over 10 years, is it going to be paid out in a lump sum all at once. And a lot of times you have to make those decisions very, very quickly. And sometimes you get put into a situation to where one of these qualifying events are triggered and you are kind of thrust into making a decision on how that money comes maybe earlier on than what you would expect.
Now, when you think about some other quirkiness with these plans, another big thing is these plans or any money that you put in here is still subject to credit or risk. So what I mean by that is like, if you’re working for an employer and the employer gets into some issues and you put money into these non-qualified plans, they can be subject and they’re not necessarily protected in some cases from your company. So if your company goes under or files bankruptcy, you could potentially be at a situation to where some or a portion or all of what you put into these, you don’t get.
So that’s very different than your traditional 401(k) where, “Hey, that’s your money, that’s protected.” That’s aside from what’s going on with your employer. So understanding some of those risks I think are really key, “Hey, there’s some great benefits, but what you really got to make sure that you understand the fine print and how these plans are applicable to your specific situation.”
Walter Storholt:
Already. I’ve heard just a couple of times the word surprise or didn’t expect.
Tyler Emrick:
Sure.
Walter Storholt:
Sounds like that’s a common issue with these kinds of things, is people get just taken off guard by some of the maybe consequences or of utilizing and saving in these plans.
Tyler Emrick:
No, you got it. I mean there’s this huge carrot, right? This huge benefit of deferring taxes and lowering your income when you’re in a high income earning year, right? Hey, if you’re still working, you got a high W-2 and a lot that’s hit in your tax return. You’re looking for places where you can lower that income, maybe get down into some of the lower brackets. These are really good for that and great. But on the flip side of it, to your point, these surprises can really come in and could potentially hurt you.
And what I mean by that is, so say for example, I mentioned earlier in the podcast about a situation with one of the hospital systems here locally in Northeast Ohio, the Summa Healthcare. They were a nonprofit healthcare system and they actually got bought out in the process of getting purchased by a PE firm, so private equity firm, that would be running the hospital now. So the hospital’s going to go from a nonprofit to a for-profit company.
There is a number of ramifications for that for the individuals that work for this hospital system. You think about like student loan forgiveness and some of those rules, that’s a big deal. But also these 457 plans or these non-qualified plans are very, very big in the healthcare industry so a lot of physicians use them. Summa would be no different. They have a 457(b) plan, they have a 457(f) plan.
So you think about a transition like that, that it was out of the control of the individuals that work for this particular hospital system, but now they’re going to be thrust into eventually likely going to have to make a decision on these plans because when you change ownership like that, well, these plans have rules that they potentially have to follow, and it could trigger a payout event to where these physicians who were working for the hospital system in probably their high income earning years are going to have a decision to make to say, “Hey, over the last 10 years I’ve been putting in a boatload of money into these accounts. I’ve got a half a million dollars in here. And on this transition now I’m going to likely have to make a decision on, well, what do I want to do with that money? I still got 10 years to go before retirement. I’m going to be in a high tax bracket. Do I want that money to be cashed out and be added on top of my already high income?”
So it can really add some tax issues as you start to think about like, well, that wasn’t on their radar, certainly wasn’t their decision, but they’re going to be put into a situation to where they’re going to have to do it.
A handful of years ago I ran into it with another hospital system in the area. Now in that case, they were able to work it to where those non-qualified deferred comp plans actually rolled into the new hospital that bought them out. They’re non-qualified plans. But you think about all the dynamics that go into that, “Hey, these are subjects to creditors. This is an asset of the firm potentially,” now you’re going to a whole new hospital system. Are you comfortable with their financial situation and some of those risks that might come into play?
So a lot to digest and a lot to think about. But these unplanned payouts, whether it be by the firm or the hospital system that you work for, can kind of put you into the situation where you are scrambling. “How do we manage this? How do we limit that big tax hit and work this for your specific situation?”
Now sometimes while this situation is in your court or the ball’s in your court to where maybe you are switching and changing jobs and you go work for another employer or another hospital system or whatever the case may be, well, a lot of times when you do that, what happens is these plans then, “Hey, that’s that triggering event. Now you are going to have to make a decision on these plans.” A lot of times they will not roll over to that new employer and you’re going to have to make a decision, “Well, hey, do you want all this money sent to you in a check? It’s all taxable. Do you want to spread out over five years, 10 years?” And you’re really kind of put in a situation where you got to make some pretty big decisions on what could be a pretty large pot of money that you’ve built up over the years.
Speaker 3:
What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day.
With a fully integrated approach to financial planning, tax strategy, investments and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.
Walter Storholt:
This definitely is something where I can just see kind of learning about it on the surface, this is denser than your typical planning process or understanding your 401(k) or your 403(b). And this is just kind of taking it to that next level of understanding these nuances and all the complications that come out of it.
Tyler Emrick:
Sure.
Walter Storholt:
So I don’t know. If you’ve been careful in your other planning, it’s time to perk the ears up even more when you’re going through something like this, it sounds like.
Tyler Emrick:
Correct. And each employer is different and can have a little different rules with the way that they have their plan set up, so understanding that I think is really key. And then of course, as you kind of think about the advisors that you’re working with, if they haven’t really asked for your summary plan description on, well, what are all these roles of these plans that we need to be mindful of, that might be a little bit of a red flag to say, “Well, hey, is my advisor kind of onboard and understanding some of the consequences of putting money in here and what’s going to be the game plan on the backside of it on how it works?” Because all the time I see where these plans, that fine print isn’t understood and then you can get into some of these payout issues where you have a very, very large tax hit when you might not have wanted to.
I even think back to a family we started working with a handful of years ago where they had worked for a very, very large firm, had been putting money into a similarly deferred comp plan. They left that firm and went working for somewhere else. And that plan had some quirkiness to where the money could stay in there. You had to say how you wanted it to be paid out when you left, but then you also had a choice to change that election. But there were certain timeframes and rules that you needed to follow to make sure that, well, hey, if you had this set to pay out in a couple years, but yet you changed your mind, well you actually had to make that election a year in advance. Or if you missed that window, well then hey, part of that plan would be cashed out.
In the family that I’m thinking of, they got into a situation where they missed one of those deadlines. And they had a pretty sizable payout while they were still working, whereas if we would’ve… Not we, but if they would’ve been ahead of the game there, they could have pushed that out and maybe deferred some of that income later on down the road when they were retired. So they’re not the only one. We run into this all the time to where you do well at your firm, you do well at the hospital system, you have some of these kind of unique plans that are available to you, but you got to make sure that you truly understand some of the quirkiness and some of the rules that need to be followed.
Walter Storholt:
Yeah, we got to make sure we’re crossing the Ts and dotting the Is. And never more important than in these kinds of moments, the consequences aren’t, okay, you’re not going to retire successfully necessarily, but the consequences sound like you could be leaving thousands, tens of thousands, maybe even more on the table if you don’t do this properly.
Speaker 4:
Sure. I mean, you think about having an extra 100,000 hit your tax return when you are in a top bracket compared to being retired and maybe in a lower bracket. I mean the delta on that tax might be 10, 12%. I mean, whatever the case may be certainly can be higher than that.
Walter Storholt:
And if you make that mistake a few years in a row? [inaudible 00:17:03]?
Tyler Emrick:
Yes. And sometimes if you make that mistake or you miss some of these deadlines, well now you’re locked in and it could have ramifications for multiple years as they pay out over a specific time period. So being mindful of this can be extremely important.
And right in our backyard here in Northeast Ohio, we’re running into it. And we run into it a lot with most every hospital system or at least the big ones here in Northeast Ohio are offering these types of plans. So understanding the ins and outs of them is a huge value add, especially here locally as we kind of think about it.
Walter Storholt:
Yeah, absolutely. So I know you guys are always looking at any of these things that pop-up and looking for opportunities. And so it’s not just how can we avoid the mistake, but then how can we make the most of the opportunities that are on the table? So where does your mind go to start navigating these waters even further?
Tyler Emrick:
Correct. Yeah, I think some of the biggest planning opportunities are going to come around this idea of income coordination or tax bracket management. We talk a lot about it with our retirees. When you head into retirement, having a good understanding of, well, how high do you want your income to be? And, “Hey, we got to hit all these goals, we got to hit spending goals, we got to do certain things, but maybe we want your income to go up higher or be lower for whatever reason.”
The tax legislation that we’ve been talking about over the last two episodes certainly has started to change some of that. But as you think about these deferred comp plans, that can be another wrinkle in here as well, right? So you start thinking about the coordination, one, while you’re working. Well, how much do you want to defer in these plans? What is your income target? We don’t want to be in a situation to where you start putting more money into these deferred comp plans, but that takes you down into a tax bracket to where, “Well, hey, maybe we want to pay taxes there.” Maybe your tax bracket is going to go up down the road, and if we start deferring income into these plans that have these rules that we need to follow and we’re saving money at 22% of federal bracket, but in retirement we think you’re going to be in 24% bracket, well hey, that doesn’t necessarily jiving or making a whole lot of sense. How can we maybe pair that with a Roth conversion or whatever the case may be?
So I think while you’re working, it still goes back to that income management and, well, hey, are we looking to save money in taxes? Are we looking to add money in taxes? As you kind of make that transition and you start heading into retirement and you’ve got to make a decision on, “Well, hey, I’ve got to decide how I want to take this money and how do I want it to be paid out.” Well, now it comes into, well, do we take a large distribution from one of these accounts early in retirement and maybe pair it with a gifting strategy like a donor-advised fund? We call that the bunching strategy.
So think of it more simply as just, “Hey, am I going to have a year where I have a bunch of itemized deductions where I’m going to be able to take my income down really low, and then if I get a distribution from one of these deferred comp plans, well maybe it doesn’t hurt me as much?” So you kind of think about the selection on how I’m going to get this money and how many years is it going to be paid out. Well, can we time it with some of these other tax planning strategies to help make sure that we mitigate the tax hit or manage how much of it hits in a particular tax bracket too.
So I think the income coordination and the income management of it, not only in retirement, but while working, I think is really key. Going back to that holistic financial planning, right? Well, why we always kind of say, “Well, hey, we got to have some type of plan in place. We got to have some type of understanding of what the next X number of years look like so that way we can make better decisions in the now.” I think it’s just more amplified with a plan like this that has the fine print that, “Well, hey, we might have to make an election or be thrust into a situation where we didn’t want, but how do we manage that in the most clear and effective way?”
Walter Storholt:
Well, I looked ahead and I see your final point on our outline here, Tyler, is TALS, the return of tax-aware long-short?
Tyler Emrick:
It is. Yes, absolutely. So we talked about I think the big planning opportunity being this income coordination, tax bracket management, how does the plan get utilized. So I think the other big area of opportunity here as well, how can we use our investment portfolio to potentially help offset some of that negative tax head or some of this extra income that we need to manage around. And the tax-aware long-short strategies, TALS, that Kevin did a wonderful job over, I think we did three podcasts, maybe four podcasts. If you haven’t checked that out, definitely go back to it.
Walter Storholt:
It’s a great series. We’ll link to it in the description.
Tyler Emrick:
Right. Yeah. Well, and these types of strategies have really just as we kind of thought of really gained some steam. I mean, I think the assets in strategies like TALS have grown substantially just this year. I think going from just under 10 billion to up over 31 billion with one of the asset managers that we work with. So it’s really catching fire and certainly becoming a very good opportunity for individuals in situations that they’re expecting a high income payout or having some tax issues. So I mean, that goes right in line with these deferred comp plans, right, and thinking about, “Well, hey, how am I going to mitigate that big tax hit in a particular year?”
Now, traditionally, you think about your portfolio, the tax code, how it’s written, has made it very hard with your traditional investments to write off losses from your portfolio against ordinary income, okay? Normally, they cap those losses at 3,000 per year that you can use to offset other parts of income inside your portfolio.
But you look at the TALS strategy, and basically utilizing it in a way where we can harvest some tax losses. And I say harvest tax losses. Remember, we’re not investing to lose money. I think that’s very key. Obviously we’re still tracking benchmarks and we’re still very much geared towards performance and strategies like this. But with the way those strategies are implemented, we’re able to harvest losses from your investment portfolio. And then we pair that with a limited partnership or some of the other structures. What we’re able to do then is say, “Hey, now we can start to look and say, ‘How do we offset some of these big tax income hits with the actual portfolio and some of our investments?’.”
And the tax aware long short strategy is the first step in that, and something that I thought it was a really good idea to bring up and make sure that if you’re in a situation, hey, if you’re in Northeast Ohio and you work for Summa and you’re saying, “Hey, I’m going to have this hit likely from what I’ve built up in these deferred comp plans.” We don’t know if it’s going to happen this year or if it’s going to happen next year or when it’s coming, but it’s probably likely on a horizon. You look at implementing the TALS strategy and starting to build up some of those losses that we can then maybe use to generate and offset some of these hits.
This is a huge opportunity. I mean, we could go from, hey, being able to write off a few thousand bucks against extraordinary income to upwards of half a million, 600,000 in certain circumstances. So a huge opportunity. I think it comes back to the, again, integrated approach and having a good understanding of like, “Well, hey, what’s my financial situation? I got my investments. I’ve got what I’ve tried to accomplish. Now I got to worry about taxes too.” And just making sure that everyone’s kind of talking together and those strategies are aligned. And as I think about deferred comp plans, I think it’s just more and more amplified from there.
Walter Storholt:
Well, there is just a little bit of a difference between about $3,000 and half a million dollars in that flexibility.
Tyler Emrick:
Yes. They’re right off opportunity. Yes, absolutely.
Walter Storholt:
TALS is a fascinating strategy. And I know you and Kevin and the team of True Wealth Design have covered that in depth on those previous episodes. And it’s something that’s drawn a lot of interest from your clients and folks looking to work with you guys. So definitely check out those prior episodes. Link in the description of today’s show. Warning, if you’re watching this on YouTube, it was before we had the video component, but still you can find it on YouTube as well as the audio apps and you can still listen to the full content there.
If you’d like to take the next step and see if you’d be a good fit to work with Tyler, Kevin, and the team at True Wealth Design, it’s very easy to do that. They like to start things off with a 20-minute discovery call. You see if you’re a good fit to work with one another and then go from there. All you have to do is go to truewealthdesign.com and click the Let’s Talk button to schedule your time to visit. We’ve got that linked in the show notes and in the description of today’s episode as well so you can find it easily. But again, it’s at truewealthdesign.com.
Tyler, great breakdown of this. Enjoyed the conversation today and we’ll look forward to catch up with you again soon.
Tyler Emrick:
Yeah, we’ll catch you on the next one.
Walter Storholt:
All right, sounds good. We’ll see everybody next time, right back here on Retire Smarter.
Speaker 4:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
