High-Income Earners: Should You Use a Deferred Compensation Plan?

May 8, 2025

If you’re a high-income professional—particularly a physician—you may be looking for ways to reduce your tax burden while building long-term wealth. One overlooked tool that can help is the deferred compensation plan.

But is it the right move for you?

Let’s explore how these plans work, how they benefit high earners like doctors and executives, and how working with specialized physician tax advisors or an accountant for physicians can ensure you avoid costly mistakes.

What Is a Deferred Compensation Plan?

A deferred compensation plan allows you to postpone receiving a portion of your income until a future date, usually during retirement. Instead of getting your full pay today, you defer part of it to reduce your taxable income now and potentially pay lower taxes later.

There are two types of plans:

  • Qualified plans like a 401(k) or 403(b)

  • Nonqualified deferred compensation (NQDC) plans such as 457(b), 457(f), and 409A

The IRS outlines how NQDC plans work here.

These plans are common in hospital systems, private medical groups, and corporations. But they come with unique tax rules and risks—making professional guidance essential.

How Deferred Compensation Plans Work

Here’s how it typically plays out:

  • You earn $650,000 this year.

  • You defer $100,000 into a 409A plan.

  • That amount is removed from your current income, lowering your taxable income to $550,000.

  • The deferred amount grows tax-deferred until payout, often during retirement.

  • You pay taxes on it later—hopefully in a lower bracket.

This strategy can result in tens of thousands in annual tax savings. But you need a physician tax advisor to make sure it’s structured correctly under IRC Section 409A.

Why Deferred Compensation Makes Sense for Physicians

Doctors typically:

  • Earn high, stable incomes

  • Face the top federal tax brackets

  • Live in high-tax states

  • Max out traditional retirement plans quickly

For these reasons, deferring income is attractive. It allows you to:

  • Reduce adjusted gross income

  • Grow tax-deferred wealth

  • Avoid taxation during peak earning years

Explore how to reduce high-state income taxes in retirement for additional savings.

Comparing 457(b), 457(f), and 409A Plans

Each plan works differently:

457(b) Plan:

  • Contribution limit: $23,000 (2025)

  • Withdrawals allowed at job separation

  • No early withdrawal penalty

  • Often offered to hospital-employed doctors
    Learn more on the IRS 457(b) page

457(f) Plan:

  • No contribution limit

  • Entire amount is taxable when vested

  • Often used for high-level executives and specialists

409A Plan:

A qualified accountant for physicians will help you evaluate which plan fits your goals and risk tolerance.

Tax Advantages of Deferring Income

Here’s what you gain:

  • Immediate reduction in taxable income

  • Tax-deferred investment growth

  • Potentially lower tax rate upon distribution

For example, deferring $150,000 at a 37% bracket saves $55,500 in current taxes. If distributed during retirement at a 24% bracket, you’d only pay $36,000—saving nearly $20,000 plus investment gains.

See IRS guidance on deferred income taxation

What Are the Risks?

Deferred comp plans aren’t insured or protected by ERISA.

You face:

  • Creditor risk: If your employer goes bankrupt, your funds could be lost

  • Lock-up restrictions: You may not access funds early without penalties

  • 409A penalties: Improper structuring leads to immediate taxation and a 20% penalty

This is where physician tax advisors bring value—analyzing plan security and designing compliant strategies to avoid IRS traps.

When Are Taxes Paid?

Deferring income won’t help you avoid payroll taxes—but it can significantly reduce income taxes when managed properly by a tax professional.

Contribution Limits and Restrictions

Here’s a breakdown:

Plan 2025 Contribution Limit Tax Timing
457(b) $23,000 At distribution
457(f) No limit When vested
409A No IRS limit At distribution

Note: Some employers allow catch-up contributions and matching. Your accountant for physicians can help you coordinate these benefits with your other retirement savings.

When Deferred Comp Makes Sense

The plan is best when you:

  • Are maxing out other retirement vehicles

  • Have predictable income and employment stability

  • Expect lower income in retirement

  • Want to smooth future income to avoid Medicare surcharges or AMT

It becomes even more useful when aligned with:

A specialist in physician tax strategies can integrate all of this into one long-term plan.

How a Physician Tax Advisor Helps

An experienced physician tax advisor helps you:

  • Run tax projections based on different payout scenarios

  • Avoid early vesting and 409A violations

  • Coordinate deferred comp with S corp tax planning

  • Time distributions for lower tax exposure

  • Reduce tax liabilities from market losses

  • Avoid stacking deferred comp distributions with RMDs or capital gains events

This level of tax strategy is beyond what general CPAs offer. You need an accountant for physicians who specializes in advanced planning.

Keep Lifestyle in Mind

Tax savings shouldn’t come at the cost of your freedom or happiness. Your plan should allow you to:

When done right, deferred compensation is a flexible, tax-smart tool—not a handcuff.

FAQ: Deferred Compensation Plans for Physicians

Q: Are deferred compensation plans safe?
Only if your employer is financially strong. NQDC plans are not protected like 401(k)s.

Q: Do I pay taxes on deferred compensation now?
FICA taxes apply when income is earned. Income taxes apply when funds are distributed.

Q: Can I access funds early?
Generally no. Plans have fixed payout schedules unless you meet a triggering event.

Q: What happens if the company goes bankrupt?
You could lose your deferred compensation. This is why plan security matters.

Q: Should I hire a physician-specific tax advisor?
Yes. A specialized accountant for physicians understands how to protect your earnings, avoid tax traps, and align the plan with your goals.

Visit contact physiciantaxsolutions.com to schedule a consultation and learn how we can help you take control of your tax strategy today.

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.

 

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