Nike Deferred Compensation Plan
By Cecil Staton, CFP®
Maximizing Your Nike Deferred Compensation Plan: Insights, Strategies, and Scenarios
As a high-earning Nike employee, you likely have access to an exclusive benefit that can significantly enhance your financial strategy: the Nike Deferred Compensation Plan (DCP). This plan is designed for eligible employees earning a base salary of $150,000 or more, providing opportunities to defer income, reduce your current tax burden, and strategically plan for retirement. However, navigating its complexities requires a clear understanding of its benefits, tax implications, and alignment with your long-term financial goals.
This article explores the essential components of the Nike DCP, including how to decide contribution amounts, manage tax implications, and structure distributions. Additionally, we’ll highlight actionable strategies to make the most of this plan.
What Is the Nike Deferred Compensation Plan?
The Nike Deferred Compensation Plan allows eligible employees to defer a portion of their income—up to 75% of their base salary and 100% of their Profit Sharing Plan (PSP) bonus—to future years. By doing so, participants can reduce their taxable income in the deferral year and potentially benefit from lower tax rates upon distribution, typically during retirement.
In addition to the tax benefits, the deferred compensation plan provides Nike employees with the opportunity to create a long-term bucket of retirement savings that aligns with their broader financial goals. For Nike executives and other high earners, this plan complements other specific employee benefits and offers a smoother transition to retirement.
Key Benefits of the Nike DCP
- Tax Deferral: Contributions reduce taxable income in the current year.
- Investment Growth: Deferred funds grow tax-deferred until distributed.
- Flexible Distribution Options: Choose a lump sum or annual installments (5, 10, or 15 years).
- Enhanced Savings Opportunities: Build a more robust retirement strategy beyond traditional plans like a 401(k).
Let’s delve deeper into how these benefits can support your financial goals.
Making the Contribution Decision
The first step is determining how much to defer. This decision requires balancing your current cash flow needs with long-term financial goals. Here are some considerations:
- Evaluate Your Cash Flow: Ensure you have sufficient funds for day-to-day expenses and emergencies before committing to deferrals. Consider leveraging Nike’s Employee Stock Purchase Plan (ESPP) shares or vested RSUs as a supplemental cash flow source.
- Maximize Other Tax-Advantaged Accounts: Before contributing to the DCP, prioritize maxing out your 401(k) (including the Mega Backdoor Roth option) and Health Savings Account (HSA), as these accounts offer additional tax benefits and are less restrictive.
- Assess Your Tax Bracket: If you’re in a high tax bracket, deferring a portion of your income can lower your taxable income, moving you into a lower bracket. For instance, deferring $150,000 from a $300,000 salary could drop you from the 35% bracket to the 24% bracket.
- Consider Future Needs: Align deferrals with upcoming goals, such as early retirement, relocating to a lower-tax state, or delaying Social Security benefits. For example, Jennifer, a Nike executive planning to retire at 55, defers 32% of her income annually. This strategy reduces her current tax bill and funds her retirement until she begins receiving Social Security at 70.
- Account for Long-Term Goals: Your financial future depends on strategic planning. Contributions to the Nike Deferred Compensation Plan can help you create intermediate-term buckets and long-term buckets of wealth, enabling you to achieve your financial goals over the foreseeable future.
Tax Implications of Deferred Compensation
Deferred compensation plans offer significant tax advantages, but they also come with nuances that require careful planning:
- Current-Year Tax Savings: Contributions to the DCP reduce your taxable income for the year, lowering your tax bill. For example, a participant earning $300,000 annually who defers $100,000 could save thousands in taxes.
- Future Tax Rates: Distributions are taxed as ordinary income when received. If tax rates rise in the future or your retirement income is higher than anticipated, your effective tax rate may increase. Strategic planning is crucial to mitigate this risk.
- Payroll Taxes: Deferred income is subject to Federal Insurance Contributions Act (FICA) taxes in the year earned, even though it’s not distributed until later. This means that your lump sum or installment payouts will still reflect prior payroll tax considerations.
- State Tax Considerations: High earners planning to relocate to states like Texas or Washington (which have no income tax) should evaluate how to maximize tax savings by aligning their payout schedules with these moves.
Distribution Options: Planning Your Payout Strategy
Participants in the Nike DCP must elect their distribution schedule at the time of deferral. Options include:
- Lump Sum: Receive the entire balance in one payment.
- Installments: Spread distributions over 5, 10, or 15 years.
Each option has unique implications for your tax burden and financial goals:
- Lump Sum: Ideal for those relocating to a no-income-tax state or needing large funds for a significant expense. However, this option could push you into a higher tax bracket.
- Installments: Provides steady income, smoothing out tax liability over multiple years. For example, Jennifer’s $2.2 million DCP balance is distributed over 15 years, providing $146,667 annually in taxable income.
- Distribution Election Strategies: By planning your distribution election carefully, you can align payouts with other retirement benefits, such as Social Security and required minimum distributions (RMDs) from 401(k) and IRA accounts. A Certified Public Accountant (CPA) can help model these scenarios.
Common Pitfalls to Avoid
- Overcontributing: Excessive deferrals may leave you cash-strapped and at risk of higher taxes upon distribution. Balance is key.
- Lack of Diversification: Funds in a deferred comp plan are an unsecured liability of the company. Diversify your portfolio to mitigate risks tied to Nike’s financial stability.
- Unplanned Career Changes: Leaving Nike before planned retirement triggers your distribution schedule, potentially resulting in an unexpected tax burden.
- Ignoring Future Tax Rates: Tax laws may change, and deferring income now could lead to higher taxes later. Work with a financial advisor to model various scenarios.
Integrating the Nike DCP Into Your Financial Plan
Maximizing the benefits of the Nike Deferred Compensation Plan requires a comprehensive strategy:
- Coordinate With Other Benefits: Utilize Nike’s 401(k) and Mega Backdoor Roth provisions, ESPP, and RSUs in tandem with the DCP to create a holistic financial plan.
- Plan for Retirement Income: Consider the sequence of withdrawals from your DCP, 401(k), IRAs, and Social Security. Deferring Social Security could increase your lifetime benefits.
- Engage a Financial Advisor: A Certified Financial Planner (CFP®) can provide projections and strategies tailored to your goals, ensuring you’re on track for the future.
- Monitor Your Investments: Funds in the DCP grow tax-deferred but are subject to market risks. Review your investment allocations annually to align with your risk tolerance and goals.
- Factor in Additional Benefits: Don’t overlook additional specific employee benefits, such as profit sharing plans or long-term incentive payments. These can provide extra opportunities to save for retirement.
Scenario: Balancing Tax Savings and Retirement Goals
Case Study: Michael, a Senior Nike Executive
- Income: $400,000 (base salary) + $100,000 (PSP bonus)
- Goals: Retire at 60, relocate to a no-income-tax state, and delay Social Security until 70.
Strategy:
- Michael defers $200,000 annually ($150,000 from his salary and $50,000 from his PSP bonus).
- He maxes out his 401(k) contributions, including catch-up provisions, and leverages the Mega Backdoor Roth.
- Michael elects a 10-year installment distribution schedule starting at age 60, smoothing out taxable income.
- Upon retirement, he relocates to Texas (no state income tax), reducing his overall tax burden.
Outcome: Michael achieves a smoother transition to retirement, minimizes his tax liability, and preserves more of his wealth for future goals.
Coordinating the Deferred Compensation Plan With Other Nike Benefits
The Nike Deferred Compensation Plan is a powerful tool, but it doesn’t operate in isolation. To maximize your financial success, it’s crucial to integrate it with other Nike benefits, such as stock options, RSUs, and your overall compensation package.
- Stock Options and RSUs: Nike stock options and RSUs can complement your deferred compensation plan. RSUs vest regularly, and you can sell them to supplement cash flow while deferring income in the DCP. Additionally, consider diversifying away from concentrated company stock to mitigate risk.
- Nike 401(k) Plan: Before contributing to the DCP, ensure you are maximizing contributions to your 401(k), including the Mega Backdoor Roth provision. This ensures you’re taking full advantage of tax-advantaged retirement savings.
- Profit Sharing Plan (PSP): Nike’s PSP bonus is a significant part of your compensation package. By deferring 100% of your PSP bonus into the DCP, you can strategically lower your taxable income.
- Health Savings Account (HSA): For high-deductible health plan participants, maxing out your HSA contributions can offer triple tax benefits and provide another tax-advantaged savings vehicle for healthcare expenses in retirement.
- Comprehensive Financial Planning: A well-coordinated strategy ensures all components—from RSUs to deferred compensation to your base salary—work together seamlessly. By aligning these benefits with your long-term goals, you can reduce your tax liability, build wealth, and achieve financial wellness.
Next Steps: Is the Nike DCP Right for You?
The Nike Deferred Compensation Plan offers powerful tax and savings benefits for high earners, but it requires careful planning. Answer these key questions before participating:
- How much income can you afford to defer without impacting your current lifestyle?
- What are your anticipated tax rates in retirement?
- How does the DCP fit into your broader financial strategy?
- Are you comfortable with the risks associated with deferred compensation plans?
At Arch Financial Planning, we specialize in helping Nike employees navigate complex compensation plans. From projecting long-term tax implications to structuring payouts for maximum benefit, we’re here to guide you every step of the way. Let’s create a strategic plan that aligns with your goals, minimizes tax surprises, and ensures financial wellness for the foreseeable future.
Schedule a consultation today to make the most of your Nike Deferred Compensation Plan.
Author: Cecil Staton, CFP® CSLP®
I'm a fee-only financial advisor for dentists serving clients nationwide.
I left the large financial institutions to start my own RIA. I did it so people could pay for real planning and not just an agenda to sell a hidden product. As a fiduciary, Arch Financial Planning, LLC was built on that promise by delivering non-cookie-cutter plans that provide solutions to achieve their goals.
Who do I serve?
Typical: Dental practice owners
Goals: Pay off student debt, start/sell a practice, and grow their wealth
Location: Virtually anywhere in the U.S.
Want To Be Smarter With Money Than Your Friends?
Our latest comprehensive guide for dentists & physicians highlights the 7 BIGGEST steps you must take now.
Disclaimer:
This website (the “Blog”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as a description of services provided by Arch Financial Planning, LLC or Cecil Staton, CFP® CSLP®.
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about personal financial planning. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction, or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorized to provide investment advice.