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Finance

What Happens to Deferred Compensation If I Quit My Job?

A deferred compensation plan is a plan in which employees defer part of their compensation until a later date. Usually, the date when the additional funds are disbursed to the employee is the date of retirement, although some plans enable flexibility for major expenses like children’s college or buying a house.

What happens to deferred compensation if I quit?

Most of us don’t stay in one job forever. You have options for what to do with your 401(k) or another qualified deferred compensation plan when you quit or are let go from a job. You should check your specific plan for details.

In general, you pay income tax on withdrawals from a qualified deferred compensation plan. Early withdrawals might result in a 10 percent penalty on the money as well (although the CARES Act removed the 10 percent penalty temporarily on up to $100,000 of early 401(k) withdrawals).

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With a qualified plan like a 401(k), you can take a hardship withdrawal and only pay income tax without the added 10 percent tax. You might also be able to roll over the money to an IRA or Roth IRA (but not with a non-qualified plan).

If you quit at age 55 but before 59.5, you can use the “separation from service” distribution to avoid the 10 percent penalty when withdrawing from your last qualified deferred compensation plan.

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Some NQDC plans stipulate that you could forfeit all or part of your deferred compensation if you leave the company early. Merriman says that these are sometimes used as “golden handcuffs” to maintain loyalty in higher-up employees.

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Source: istock

View more information: https://marketrealist.com/p/what-happens-to-deferred-compensation-if-i-quit/

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