A Deferred Compensation Plan will allow you to defer some of your current income, earn a rate of return on these payments, and then receive the deferrals at a later date. If you have already exhausted your tax-deferred savings (i.e.401(k), HSA, IRA) take a look at a Deferred Compensation Plan.
This plan can be a game-changer for those of you who want to defer some of your income and save on taxes. If you're an AbbVie employee, grade level 20 or higher, you're in luck, because you have access to the AbbVie Deferred Compensation Plan (unless you are an executive, and are on AbbVie’s Supplemental Savings Plan instead). Pro tip: the best time is often when you are retired and in a lower tax bracket.
How does AbbVie’s Deferred Compensation Plan Work?
It's simple, really. Each year you decide how much of your upcoming salary to defer in that calendar year. The amount you defer is then invested and the rate of return is then credited to your deferred amount. You don’t own the investments, but at least you're getting something out of it.
You can defer between 5% and 75% from your base compensation, sales-related compensation, and bonus compensation. It’s worth noting that each year you can choose to change the combination or even decide not to participate at all if you want to skip a year. Similar to a 401(k), AbbVie also contributes 5%, so the more you defer of your own income, the larger the actual contribution will be from AbbVie!
How and When Do You Get Paid Your Deferred Amount?
You can choose when you want to receive your deferred amount. The deferral can be paid out to you any time after two years on the DCP. Often employees will defer while their income is high so that firstly, their income will be taxed at a lower rate, and secondly, they can receive the deferral payments when they are most needed. This often means it is worth waiting until retirement to get paid the deferred amount. Talk about smart financial planning!
There are a number of payment options you can choose from. Your deferral amount can be paid to you:
- Quarterly or in annual installments over fifteen, ten or five years
- In a lump sum (If the balance in your DCP is less than $15,500, then the amount will automatically be paid as a lump sum)
- A combination of both
A word to the wise though, because it is the company that holds your DCP, if you have chosen to receive your deferral amount at retirement but AbbVie terminates your employment before you retire all of your deferred compensation will be paid out within 90 days of you leaving AbbVie.
Are There Risks with the DCP?
Well, yes. As with most plans, there are of course some risks. Your deferred income remains in an AbbVie account and belongs to AbbVie, until it gets paid out to you. Hopefully, you will receive a bigger pay-out than the income you deferred, however, there is always the risk that if (and that’s a very small “if”) AbbVie was to go bankrupt, creditors could claim the money. Given AbbVie’s size and revenue though, you probably don’t need to lose sleep over it, but it is something you should consider, nonetheless.
Is AbbVie’s Deferred Compensation Plan Right for You?
If you've already maxed out your tax-deferred savings and are looking for another way to defer income to save on taxes, then this plan is definitely worth mulling over.
To start with, it is best to defer into funded accounts (401(k), HSA, etc.). After that balance your savings into tax-free and taxable accounts. Don’t forget to take into account your financial goals too, like paying off your mortgage and college funds. AbbVie's Deferred Compensation Plan can then be a powerful tool for further smart financial planning.
Remember, you can defer as much or as little as you like of your income into AbbVie’s Deferred Compensation Plan, so it's totally up to you. Everyone’s situation is different, and we can help with advice tailored just to you.