Nonqualified deferred comp enrollment usually opens in the fall, and whatever you elect for 2027 pay has to be irrevocable before January 1. Performance-based compensation gets a longer runway — up to six months before the performance period ends. Miss your window and the year is gone.
The form asks two questions. How much to defer out of a 37% top marginal bracket is arithmetic. When the money comes back — a fixed year, separation from service, or installments — is the one that follows you around. Change your mind later and Section 409A makes you push the new date at least five years out, elected twelve months in advance. Get the mechanics wrong and every vested dollar under that plan not already taxed becomes income now, plus a 20% additional tax, plus premium interest.
Here’s the part that matters in Austin, because most of the executives we meet earned the deferral somewhere else. Federal law — 4 U.S.C. § 114 — says only your state of residence may tax retirement income. Deferred comp counts only when it’s paid in substantially equal payments, at least annually, over your life expectancy or at least ten years. Elect ten years or longer and the payout sits inside that protection, which matters if you’re retiring to Texas and its zero income tax. Shorter schedules and lump sums turn fact-specific: payments from a plan maintained solely to provide benefits above qualified-plan limits are treated differently from ordinary elective deferrals, and the states don’t read the statute uniformly. New York has ruled that lump sums from such plans to nonresidents fall outside its reach; California’s own guidance takes a broad view of nonresident plan distributions. The point isn’t that one election saves tax. It’s that a box you check years early helps decide which state gets to ask.
Two more things. Deferred comp is an unsecured promise from your employer — if the company files, you’re a general creditor in line, which argues for sizing the deferral deliberately rather than maxing it because the plan allows it. And check your RSU withholding while you’re in that file. Vests are withheld at a flat 22% up to a million dollars of aggregate supplemental wages, 37% above that. At a 35% or 37% rate that’s a thirteen- to fifteen-point gap on every vest, surfacing as a balance due in April, sometimes with a penalty on top.
Here’s what we’d tell any client: the deferral percentage is the reversible decision — you get a fresh election every year. The distribution schedule is the one you live with for a decade. We don’t eyeball it. We model each payout election against your projected bracket, your residency, and your liquidity, and let the numbers pick. For some families that math argues for deferring less than the plan permits, but that’s a conclusion to reach on your own numbers.
If your enrollment window opens in the next few weeks, this is worth an hour with us and your CPA before you sign. Your CPA confirms the tax treatment on your records; your attorney reviews the plan document where the payout form is the question.
For informational and educational purposes only. Not investment, tax, or legal advice. Lake Hills Wealth Management does not provide tax or legal advice and nothing herein is a recommendation with respect to any specific transaction or a recommendation to any individual. The treatment of any deferral depends on the written terms of your employer’s plan, the structure of your election, your state of residence and domicile at the time of payment, and your individual tax situation. State law and state administrative positions vary, residency is determined on your specific facts, and the states do not interpret 4 U.S.C. § 114 uniformly. Withholding rates and bracket thresholds are those in effect for the 2026 tax year and are adjusted periodically. Any deferral or distribution election should be confirmed in advance with your certified public accountant and, where appropriate, your attorney, who are responsible for the tax and legal treatment of the transaction. References to equity compensation are for illustration only and are not a recommendation to buy or sell any security. We will provide all prospective clients a copy of our current Form ADV, Part 2A (Disclosure Brochure) prior to commencing an advisory relationship. At any time you can view our current Form ADV, Part 2A at adviserinfo.sec.gov. Additional information about Lake Hills Wealth Management, including our Form ADV Part 2A and Form CRS, is available at lakehillswm.com. Lake Hills Wealth Management is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training.