NDCP | Best Ways to Pay for College

Are Nonqualified Deferred Compensation Plans the Best Way to Pay for College?

In the Winter 2020 edition of Defined Contribution Insights (available here) Plan Sponsor Council of America (PSCA) published the first of a two-part article comparing saving for educational expenses via a tax-qualified 529 Plan and a nonqualified deferred compensation plan (DCP) or 409A plan.

MBS Principal John Sanford, co-author of the article, reviews 409A plans and how they may be used to pay for college expenses. Highlights include:

• Planning and saving for college expenses as early as possible is key to meeting future needs.
• A 409A DCP is a pre-tax contribution with tax-deferred growth and ordinary income taxes being paid upon distribution, so there is more focus on future income tax rates.
• The 409A DCP has no restriction on contributions and total flexibility over how distributions are used.
• If needs change, the distribution can be postponed and/or redirected into another account. This flexibility can facilitate converting unused or unneeded college education balances into retirement savings.
• Additional benefits include aligning participant incentives with meeting specific goals and the ability for participants to arrange distributions in order to reduce or avoid paying state income tax.

Plan Sponsors may want to note the advantage of funding education expenses in their DCP enrollment material.

If you would like to discuss the advantages of using a deferred compensation plan to save for educational and/or other future expenses, please reach out to your Mullin Barens Sanford Financial consultant or schedule a call via this link.

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