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  • 409A

    I'm aware of certain jobs that offer what I can only surmise are 409A plans, in that they allow massive amounts of deferrals beyond the 401/403/457 limits.  How much finagling can you do with these plans?  Reduce your income to the point of getting EITC?  Reduce income to get better college aid packages?  I know it probably doesn't make sense on the margin to be doing some of those things to (likely) pay a higher tax rate later on withdrawal, but I'm intrigued by the possibilities.  Or is it as simple as reducing you to a marginal tax rate that you think will be higher than your effective rate on withdrawal - perhaps reducing to the 28% bracket limit, for example?  Anyone have one of these and talk to a tax advisor on strategies for dealing with them?

  • #2




    I’m aware of certain jobs that offer what I can only surmise are 409A plans, in that they allow massive amounts of deferrals beyond the 401/403/457 limits.  How much finagling can you do with these plans?  Reduce your income to the point of getting EITC?  Reduce income to get better college aid packages?  I know it probably doesn’t make sense on the margin to be doing some of those things to (likely) pay a higher tax rate later on withdrawal, but I’m intrigued by the possibilities.  Or is it as simple as reducing you to a marginal tax rate that you think will be higher than your effective rate on withdrawal – perhaps reducing to the 28% bracket limit, for example?  Anyone have one of these and talk to a tax advisor on strategies for dealing with them?
    Click to expand...


    https://www.irs.gov/retirement-plans/409a-nonqualified-deferred-compensation-plans

    https://www.irs.gov/uac/frequently-asked-questions-sec-409a-and-deferred-compensation

    There is no way to open a 'solo 409a' plan, if that's what you are asking. You don't get a tax deduction, and you are not deferring taxes, just your salary, so any growth would be taxed as income.  If you have your own business, you can just as well keep the money 'in the company' if you have an S-corp.  As an employee, there is not much control over these plans, the rules are set in stone.  Even if you defer your entire salary until next year, you'll have to take it the following year, so that won't be very useful (at least that's how IRS examples above are written).
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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    • #3
      I have a 409A, that's the only option available to me through my employment. The advantages with my plan is that I can stash up to 70% of my income in it if I wanted. There are plenty of good investment options and the management fee is about the same, if not lower, than my old 401K before we had to switch. I haven't invested enough to take advantage of lower tax brackets because of the 2 main disadvantages of the plan: 1) in theory, if the large health system in our area became bankrupt, your retirement comes behind a list of creditors. It is set up like a rabbi trust so it's supposed to be guaranteed, but depends on how much faith you have in the system, I suppose. The bigger problem is that 2) if you leave, you have to take your savings as a lump sum with no option to rollover.

       

       

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      • #4
        The distribution options make this a plan far less attractive than even a non-governmental 457, with all of the known 457 disadvantages, and none of the advantages.  In theory, many 457 plans allow significant tax deferral opportunities, but only those plans with more flexible long term distribution options make sense.
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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