NQDC Learn - Learning center

Nonqualified deferred compensation learning center

A nonqualified deferred compensation (NQDC) plan is a special benefit that gives key employees like you more control over your taxes, retirement income strategy, and investments. Here are a variety of resources designed to help you make informed decisions about participating in a plan and maximizing on the benefits.

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NQDC education videos

Explore these short videos that can quickly get you up to speed on all things deferred comp—including NQDC basics, how deferred comp could help you manage your taxes, what to expect when you enroll in a plan, and more.

 

How an NQDC plan can work for you

We all have different needs and unique expectations for retirement. Traditional retirement savings accounts work well for many people, but the contribution limit can create a savings gap, depending on your retirement needs.

A deferred comp plan can help you solve for that by bridging the gap between the income earned while you’re working and other retirement income that’s still growing or isn’t available yet, like Social Security.

With a nonqualified deferred comp plan, you can:

  • Potentially grow your savings.
    Pre-tax deferrals result in tax-deferred growth, allowing compounded earnings to help you save more.

  • Manage your taxes.
    Deferring a portion of your compensation reduces your taxable income. And you’ll have more control over how and when you pay taxes on what you saved.

  • Supplement and diversify your retirement savings.
    Deferred comp plans allow you to save more than the contribution limits of qualified plans, such as a 401(k).

  • Retire on your schedule.
    You have the flexibility to decide how much to defer and for how long, with no age-based restrictions.

 

Is a NQDC plan the right fit?

A deferred comp plan is a long-term financial tool you can use as part of your retirement strategy. If you’re interested in saving more, managing your tax bill, or retiring early, a NQDC plan could be for you.

Before participating in the deferred comp plan,  you may want to make sure you're making the most of your organization's 401(k) plan. Once you've contributed all you can to the 401(k) plan, participating in a deferred comp plan may make sense as a way to continue to supplement your retirement income.

What are the tax implications?

Knowing the impact of taxes can help you determine how much of your income to defer. With an NQDC plan, you’re setting aside money before taxes come out (pre-tax), and the earnings on those dollars compound on a tax-deferred basis. That means more of your money is working for you.

This advantage increases dramatically the longer you let your balance grow. Also, by strategically timing when you pay taxes, you may find you’re able to lower your tax bracket in your retirement years. Keep in mind that distributions from a nonqualified deferred comp plan are treated as ordinary income, and subject to current federal and state income tax.

What's the difference between nonqualified and qualified plans?

Both nonqualified plans and qualified plans, like a 401(k), 403(b), or IRA, are tax-deferred. Nonqualified plans are unique in the following ways:

  • Contributions are not capped. (Qualified plans have a government-imposed limit.)
  • There are no age-based rules about when money is received.
  • The government doesn’t provide the same kind of protection because it falls outside employee retirement securities act (ERISA) guidelines.
  • It’s a contractual obligation between you and your employer.

Maximize your plan

Plan to reach your retirement goals.

For employees like you, it may be a challenge to meet your retirement goals by solely relying on Social Security and 401(k) plans. Participating in your employer’s deferred comp plan can help you achieve your retirement strategy.

These tools and resources can help you make decisions to get the most out of your plan:

You may want to consider investing the money you defer.

Through the deferred compensation plan, you can direct deferrals to a variety of reference investment options. Each investment option offers a different level of risk and potential return. That means you can make choices that complement your overall financial strategy.

Take a quiz to assess your comfort level with investment risk (PDF).

Help protect your loved ones.

When you enroll in your organization’s nonqualified deferred compensation plan, you’ll designate one or more beneficiaries. They’ll receive the money from the plan if you pass away. Who you select is legally binding and overrides your will, so keep your beneficiaries updated to ensure the money in your account will be distributed the way you want.

You can review or change your beneficiaries anytime by logging in to your account.

Anticipating a distribution

What events trigger a distribution?

During enrollment, you’ll designate when you want to receive your money from the deferred comp plan. Ask yourself:

  • What goals or milestones do I want to save for?
  • When will I need the money to ensure I can fund those goals?
  • Do I want a lump sum payout or installment payments?

Distributions can be triggered by events that are:

  • Within your control, like leaving an employer for a new job or due to retirement.

  • Out of your control, such as a death, disability, change in the company’s control, or financial hardship.

 

What happens if you leave your employer?

Whether you leave by choice or lose your job, this event will trigger distribution of your deferred comp plan benefits.

FAQs: Unplanned early distributions

Have questions about unplanned early distributions from the nonqualified deferred comp plan? Check out the answers to these frequently asked questions.

How much should I expect?

Log in to principal.com and click on “Distributions” to view your distribution summary. Just enter the date you’ll leave your employer and get an estimate of your distribution payment.
When can I expect my payment?

If your employer issues payment, contact your human resources representative to get a date. If your check is issued by Principal, you can expect payment to be made within 7-10 business days following distribution date. If you are not sure who is issuing the payment call Principal.
When am I taxed on the distribution from my nonqualified deferred compensation account?

When you receive a distribution, upon attaining a qualifying distribution event as defined by your plan, you will have to pay federal income taxes on it. The impact of state and local taxes is complex. Consult with your tax advisor to understand how much, if any, state tax you’ll incur, and which state tax laws are applicable to your distribution. (Note: Depending on the timing of the distribution, you may be taxed either under the laws of the state you worked in or the state where you receive your distribution, or both.)
How do I offset tax implications?

You cannot rollover money to other tax-deferred plans. If your new employer has a NQDC plan, ask your financial professional about potential strategies.
What should I discuss with my financial professional?

Receiving additional income taxed as ordinary income may have some implications. A financial professional can help ensure you’re maximizing on your payout.
What do I do with my lump sum?

We recommend talking with your financial professional to see how you can maximize on your lump sum.
How do I change my payout?

Some plans allow for changes to the frequency or method of payment, but they must be done at least a year in advance and be delayed by five years from the original payment date. If your distribution is scheduled to occur within the next 12 months you are not eligible to change the payout.

Approaching retirement

If you’re thinking about retiring, check out this guide (PDF) which can help you decide when to make your move.

FAQs: Planned distributions

Have more questions on distributions from the nonqualified deferred comp plan at retirement? Check out the answers to these frequently asked questions.

How much will I receive from my NQDC plan at retirement?

Distributions are selected when you enroll or re-enroll in the plan. Log in to and click on scheduled Distributions to view how your distributions are set up.
When and how can I expect my payment?

If your check is issued by Principal, you can expect payment to be made within 7-10 business days following distribution date. If you are choosing direct deposit, make sure you have provided updated account information.
What do I do with my lump sum?

Some plans allow changes to payouts, but they must be done at least a year in advance and delay at least five years from the original payout date. All changes to your retirement distributions must be processed through your employer’s human resources department.
What do I do about my health insurance?

Staying healthy plays a big role in helping you make the most of your retirement years. That’s why working health care costs into your retirement budget is important.
When should I start receiving Social Security?

Timing is everything when it comes to planning for retirement. This Social Security Q&A can help answer your questions (PDF).

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The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Company®. Plan administrative services provided through Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., member SIPC, and/or independent broker/dealers. Referenced companies are members of the Principal Financial Group®, Des Moines, IA 50392.

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