Executive Retiring at 62 With Deferred Comp

This is a composite. No single client, just the same story I’ve seen enough times to stitch one person out of the pattern.

Meet Paul. Sixty-two, just retired from a senior operating role at a public company. Two big assets defined his exit. A non-qualified deferred compensation balance of about $1.4 million, the bonus money he’d elected for years to defer instead of taking as salary. And a 401(k) stuffed with company stock he’d accumulated since the nineties, worth around $900,000, with a cost basis of maybe $120,000.

He came in with a plan already half-made. Take the deferred comp as a lump sum, roll the whole 401(k) to an IRA, simplify everything, done. Clean. It was also the most expensive thing he could have done.

The two traps hiding in the paperwork

Deferred comp is not like a 401(k). It’s an unsecured promise from your former employer, and you only get to choose the payout schedule once, usually long before you retire, locked in. When it pays, it’s ordinary income. A $1.4 million lump sum in a single year would have stacked on top of his final partial salary and rocketed him into the 37% federal bracket, the top rate, which for 2026 starts at $640,600 of taxable income for a single filer.

That’s the first-order problem. The second-order problem is worse. A spike that size raises his Medicare premiums two years later through IRMAA, the income-based surcharge, and a one-time income mountain like that can push him into the highest IRMAA tier for a full year.

Then the company stock. If he’d rolled it into an IRA like everything else, every future dollar he pulled out, including all that built-in gain, would come out as ordinary income taxed at his top rate. He’d have converted a capital gain into ordinary income and never realized he’d done it.

The lever most people roll right past

There’s a rule for company stock inside a workplace plan called Net Unrealized Appreciation, or NUA. Here’s the trade. You move the actual shares into a regular taxable brokerage account instead of rolling them to an IRA. You pay ordinary income tax now, but only on the cost basis, the $120,000 he originally paid. The gain, the other $780,000, gets taxed at long-term capital gains rates when he eventually sells, not ordinary rates.

For 2026, the top capital gains rate is 20% against a top ordinary rate of 37%. On $780,000 of appreciation, that spread is real money. The NUA election has strict rules and you usually get one clean shot at it, so it has to be done right, in the right year, with a qualifying triggering event. It is not a December scramble.

What we did instead

The deferred-comp schedule was already locked, so we worked with what he’d elected and built the rest of his income around it, smoothing withdrawals in the lighter years so nothing else piled onto the heavy ones.

On the stock, we ran the NUA election. The basis got taxed now at ordinary rates, the shares landed in his taxable account, and the embedded gain was reclassified as a future capital gain. We also flagged it as a concentrated position, $900,000 in one company is a risk all its own, and started a deliberate plan to trim it over time at favorable rates.

The outcome

The number that mattered wasn’t a return. It was the gap between two tax bills on the same assets. Routing the stock through NUA instead of an IRA, and refusing to let the deferred comp dictate a panic lump sum, is projected to save him a six-figure sum across the next several years.

Paul’s instinct was to simplify. Simple felt safe. But the simple version handed a slice of thirty years of work straight to the IRS for no reason. The whole job was slowing him down long enough to see it.