How to Transfer a Deferred Compensation Plan to an Annuity
Jason Stolz CLTC, CRPC
Transferring a deferred compensation plan to an annuity can transform a future employer payout into a personal, flexible income plan. This move preserves your tax-deferred savings, ensures guaranteed lifetime income, and allows you to control how and when income begins. For executives and professionals with nonqualified deferred compensation (NQDC) accounts, an annuity can help stabilize future cash flow while protecting principal from market volatility.
This page explains eligibility, rollover mechanics, tax treatment, and the steps to properly transfer your deferred compensation balance into a qualified or nonqualified annuity. Before beginning, it’s helpful to review how a deferred compensation plan works to understand deferral timing and payment rules.
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Who Can Transfer a Deferred Compensation Plan?
Most nonqualified deferred compensation (NQDC) plans are tied to employment and have specific payout restrictions. However, once your plan allows distribution—typically upon separation from service, retirement, or a specified deferral date—you can direct the proceeds into an annuity. Some government 457(f) or 457(b) plans also permit transfers within narrow windows.
- Corporate executives: Eligible after leaving the employer or reaching the deferral date.
- Public employees: Certain 457(b) balances can roll directly into a qualified annuity.
- Nonqualified plans: Usually paid as income, but proceeds can then be placed into a nonqualified annuity for continued tax-deferred growth.
Why Transfer Deferred Compensation to an Annuity?
An annuity helps you maintain long-term control of deferred earnings while providing income certainty. Key advantages include:
- Guaranteed lifetime income: Turn future payments into steady, predictable income.
- Principal protection: Eliminate market losses while continuing to grow tax-deferred.
- Timing flexibility: Delay income start dates to match your broader retirement plan.
- Estate planning options: Choose survivor or beneficiary structures unavailable through many employer NQDC plans.
Step-by-Step: How to Transfer a Deferred Compensation Plan to an Annuity
- Confirm plan distribution terms: Check when and how your plan allows payouts—retirement, resignation, or fixed-date elections.
- Select the right annuity: For income now, use an immediate annuity; for growth, consider fixed or fixed indexed designs.
- Establish the annuity: Your advisor opens the appropriate account, qualified or nonqualified, depending on the plan type.
- Direct the transfer or reinvestment: For qualified plans (e.g., 457(b)), request a direct trustee-to-trustee transfer. For nonqualified plans, use post-distribution reinvestment.
- Align payout timing: Match annuity start dates with Social Security and other income sources.
Tax Considerations for Deferred Compensation Transfers
Qualified plan balances (like 457(b)) can roll directly to an IRA or qualified annuity without triggering taxation. Nonqualified deferred compensation (NQDC) distributions, however, are taxable upon payout. By immediately placing after-tax proceeds into a nonqualified annuity, you can continue to grow funds tax-deferred and spread future income over time.
Always ensure compliance with Section 409A and consult your plan administrator before initiating any transfer to avoid penalties or disqualification.
Deferred Compensation vs. Annuity Comparison
| Feature | Deferred Compensation Plan | Annuity |
|---|---|---|
| Payout Flexibility | Limited; fixed distribution schedule | Custom start dates and payout options |
| Tax Deferral | Tax-deferred until paid | Tax-deferred growth within the annuity |
| Market Risk | Subject to employer’s financial health | Backed by insurance carrier guarantees |
| Beneficiary Options | Often limited | Flexible designations and spousal riders |
Common Mistakes to Avoid
- Taking a cash payout: This triggers taxes and eliminates future deferral benefits.
- Missing plan deadlines: Deferred comp elections are legally binding and cannot be changed retroactively.
- Using the wrong annuity type: Match the product to your income horizon—immediate or deferred.
- Overlooking carrier ratings: Choose A-rated insurers to protect deferred income.
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FAQs: Transferring a Deferred Compensation Plan to an Annuity
Can I transfer a deferred compensation plan to an annuity tax-free?
Qualified 457(b) plan rollovers can move directly to a qualified annuity without tax. Nonqualified plans are taxable when paid but can be reinvested in a nonqualified annuity for future tax-deferred growth.
When can I move my deferred compensation balance?
Transfers typically occur at retirement, job separation, or your elected distribution date, depending on your plan document.
What type of annuity should I use?
Immediate annuities are best for income now, while fixed and fixed indexed annuities allow continued tax-deferred growth and flexible start dates.
Will I owe early withdrawal penalties?
Not if funds move through a compliant transfer or reinvestment. Penalties apply only for direct withdrawals before age 59½ from qualified accounts.
Can I name beneficiaries on the new annuity?
Yes. Annuities allow customizable beneficiary options, including spousal continuation and period-certain payout provisions.
Can I combine multiple deferred compensation payouts?
Yes, as long as distributions have occurred and are after-tax, you can consolidate proceeds into a single nonqualified annuity for simplicity and continued deferral.
