Saturday, December 4, 2010

Unsure About Tax Rates Rising, Defer Anyway!

Where do you think your marginal tax rate will be in 2011? How about in 2012? 2013? You don't know? You're not sure? If you're a high earner, let's say $500,000 or more, are you concerned? Of course you are.

Should rising tax rates changes your deferral behavior? To the extent that you will have less take-home pay, perhaps it should. To the extent that you have a fear of deferring at a lower marginal rate and later being taxed at a higher marginal rate, the answer may surprise you.

Here is an article written by a few former colleagues of mine that I reviewed : 

To quote from the article, "As shown above, the advantage of deferred compensation is impacted by changing tax rates. Although it may seem counter-intuitive, a long-term increase in tax rates during the deferral period actually provides the greatest relative advantage for deferred compensation."

Let me re-phrase: when marginal tax rates are rising over time, there is more advantage to deferring compensation (assuming security of course) even on a nonqualified basis. In a qualified plan, there is even more advantage.

So, put your intuitive thinking aside, take a look at the article and consider deferring what you can,

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