Deferred Compensation Plans vs. 401(k)s: Essential Insights for Welltower Employees Navigating Retirement Savings

Healthcare Provider Update: Healthcare Provider for Welltower Welltower Inc., a leading provider in the healthcare real estate sector, partners with various healthcare service providers, including senior housing operators, post-acute care facilities, and health systems. The company focuses on investing in properties that accommodate the healthcare needs of an aging population, ensuring that it collaborates effectively with top-tier operators to enhance care quality and access. Potential Healthcare Cost Increases in 2026 As 2026 approaches, health insurance premiums, particularly those tied to the Affordable Care Act (ACA), are projected to surge dramatically, potentially rising by 75% for many enrollees. Factors contributing to this steep escalation include the expiration of enhanced federal premium subsidies and escalating medical costs, with certain states experiencing increases exceeding 60%. For Welltower employees and retirees utilizing ACA coverage, these looming hikes necessitate strategic financial planning to mitigate the impact on personal budgets and healthcare access in the coming year. Click here to learn more

Exploring Retirement Planning Tools at Welltower

Deferred compensation plans play a pivotal role in retirement planning at Welltower, complementing the benefits accrued through 401(k) plans. Essentially, these plans allow employees to defer a portion of their income to a later date, enhancing their income management before retirement. For instance, an executive earning an annual income of $250,000 might opt to defer $50,000 each year until retirement, starting at age 55 and concluding at 65.

Executive Financial Strategy

Among Welltower executives, deferred compensation plans are widespread, particularly for those with substantial incomes who do not solely rely on their annual earnings for living expenses. This strategy not only reduces taxable income during active earning years but also minimizes exposure to the Alternative Minimum Tax (AMT) and enhances eligibility for tax deductions. When the deferred compensation is eventually paid—typically during retirement—the reduced regular income could place the beneficiary in a less burdensome tax bracket, optimizing tax savings.

Tax Implications and Payout Scheduling

Initially, employees must pay Social Security and Medicare taxes on the deferred amount, similar to the rest of their income. However, taxes on these funds are deferred until the actual payment date. The ability to defer a significant portion of income—often up to 50%—provides a substantial tax advantage, especially compared to the limits on 401(k) contributions.

2024 Contribution Limits and Considerations

In 2024, the maximum 401(k) contribution limit for individuals under 50 is set at $23,000, up from $22,500 in 2023 . Individuals aged 50 and older can contribute up to $30,500, an increase from $30,000. This highlights the relatively limited nature of 401(k) contributions, particularly for those with higher incomes seeking to maximize their tax-advantaged savings.

Investment Options and Accessibility

Welltower deferred compensation plans often offer a broader array of diversified investment choices compared to traditional 401(k) plans. However, these plans are generally less liquid, with funds usually inaccessible before the predetermined distribution date. This contrasts with 401(k) plans, where loans against the balance are possible, and there are provisions for early withdrawals under specific financial hardships, such as significant medical expenses or job loss.

Risks and Security

A significant risk associated with deferred compensation plans is the potential for forfeiture in the event of bankruptcy or dissolution of the employer. In such cases, unlike 401(k) plans that are protected and insured separately, deferred compensation amounts are considered unsecured credits of the employer. This positioning places them behind secured creditors, such as bondholders, in the debt settlement priority.

Strategic Management of Deferred Compensation

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It is generally advisable for Welltower employees to maximize contributions to their 401(k) before opting to divert funds into a deferred compensation plan. This strategy can help with, not only a portion of retirement savings, but also reduce the risk associated with potential corporate bankruptcy.

Combining Deferred Compensation with 401(k) Plans

Deferred compensation and 401(k) plans can coexist within an individual's retirement strategy, offering a multi-tiered approach to tax management and income distribution in later life.

Withdrawal Considerations

The terms for withdrawing from deferred retirement plans vary significantly and are determined by specific agreements between the employee and the employer. Generally, these plans restrict withdrawals until certain conditions, such as a decade of deferral or approaching retirement, are met.

Conclusion and Further Insights

Welltower employees should gain a solid understanding of the rules and potential limitations before opting for a deferred compensation plan is crucial. These plans are ideal for those who can afford to defer a portion of their income to benefit from deferred taxes and potentially lower tax rates upon retirement.

Sources and Further Reading

The Internal Revenue Service provides extensive guidelines on deferred compensation and 401(k) plans, including specific rules regarding contribution limits, taxation, and early withdrawal penalties . This resource is invaluable for individuals preparing their retirement strategies to keep compliance and optimize financial outcomes. Important references include IRS notices on eligible deferred retirement plans, topics on the Alternative Minimum Tax, updates on annual contribution limits, and guidelines on hardships and early withdrawals.

This subtle retirement planning method underscores the importance of strategic income deduction and tax management, ensuring that individuals maximize their financial resources in anticipation of retirement.