Preview of what we’ll cover today:

✈️ The details about Delta’s new deferred comp plan

💵 Potential tax benefit by deferring income into lower-tax years

⚠️ The risk of overloading your pre-tax retirement bucket

💰 How fixed income in retirement affects Medicare

Subscribe On Your Favorite App:

YouTubeApple PodcastsSpotifyAmazon MusiciHeartRadioTuneIn

More About This Episode:

Delta Airlines has rolled out a new non-qualified deferred compensation plan for pilots, and it’s raising big questions across the flight deck. To help us all better understand what this means, we’ve invited Zach Smith of Pilot Tax to break down how it works and whether it’s a smart financial move. Before you opt in, make sure you understand the risks, rewards, and long-term implications of this new Delta offering.

Go Deeper Into The Episode:

0:00 – Overview of Deferred Compensation Plan

2:19 – Positives

3:58 – Impact on Retirement and Tax Planning

7:21 – Tax Risks

11:34 – Alternative & Flexible Strategies

15:30 – Opt-Out Option and Cash Balance Plan

Resources:

Retire Pilots – https://retirepilots.com

Get your FREE Retirement Toolkit – https://bit.ly/3ZmZsaX

Pilot Tax – https://pilot-tax.com/

The Pilot’s Advisor Podcast is also on video. Watch & Subscribe on YouTube: https://bit.ly/3EIEBW2

Episode Transcription:

(Note, this is an automated transcription. Please forgive any errors.)

Ryan Fleming  00:00

Welcome to another edition of the pilots advisor podcast. We’ve been asked a lot of questions about this. Today we’re going to have Zach Smith from Pilot tax, and we’re just going to have an open conversation about something that has been offered to Delta pilots recently, and what it is is the Delta Airlines non qualified deferred compensation plan for pilots. So stick around and we’ll talk about this, and hopefully you guys will get some valuable information. Zach, it’s good to see you again. Welcome to the podcast. I appreciate you taking some time so we could talk about this new benefit that’s been offered to Delta pilots.

Zach Smith  00:38

Yeah, absolutely happy to be back here, Ryan, and this is going to be an interesting one.

Ryan Fleming  00:43

Yeah, so you’ve been asked about this a few times. I’ve had a few of my clients ask about it, and so we thought it would be valuable just to talk about it, put put together a podcast discussing the positives the negatives. Of course, like any other of our podcasts, we’re not this is not financial advice. This is not tax advice. This is two guys talking about a benefit plan that’s been offered to Delta pilots, and hopefully us discussing this could help you with a decision in the future. So I’m not going to talk about the eligibility requirements. I mean, all that stuff’s been answered in the frequent, frequently asked questions about this, so you and I can talk about the details, but I think in general, it’d be nice just to talk about some of the positives and negatives of just a deferred comp plan for anybody out there, and then maybe start talking about, you know, whether it’s beneficial to a Delta pilot. So yeah, all right, so what is it? And I’m just going to read this off. What is a deferred compensation plan, a deferred comp plan allows you to defer current income right now, typically from your flight pay or international pay, into a future year, often during retirement. So you want to basically reduce your taxable income, push it off into retirement and then get taxed on it later on. Unlike your 401 k plan, this is non qualified. It doesn’t have any ERISA protection, and we’ll say that up front, meaning by you deferring this comp, you have to make sure that Delta Airlines is a solvent company is not going to have problems in the future, because it’s not your money yet, the creditors for Delta actually will still have access to that. Okay. So the major positives, it’s a tax deferral opportunity. You just want to expand on that?

Zach Smith  02:27

Zach, yeah, I can. And so this, this is kind of a plan that’s been developed by many countries. Excuse me, many companies all over this. These things have been around for a long time. There’s really big incentive at face value, both for the companies and for potentially, the employees, right? So from a company perspective, in this case, Delta, the idea is they can reduce some of their compensation to their pilots, right? They can. They can reduce some of the outlaying cash that they’re paying them right now by deferring it into the future. Now you hit on the risk here, right? So this is great for the companies, but we’ve got to make sure there’s certainly some stability with delta over the long run here, which I don’t have a lot of concerns with Delta necessarily at face value, but they’re deferring this payment, so it’s certainly beneficial on the company side, now on the employee side, again, this is typically for highly compensated employees. You know, the criteria, as you said, have been pretty well defined on who’s eligible here, but the idea is we can reduce our taxable income today and defer this compensation in the future so that again, face value is we’re getting our tax rate down, getting our income down today.

Ryan Fleming  03:31

Yeah, one of the other positives I saw about this program that I was immediately a concern, that we discussed was the potential for investment growth. Are we just deferring compensation and then it just sits there, and you lose out on the time value of money over all this time, depending on when you deferred it. And it sounds like under this plan, they’re going to be give the option. And of course, I don’t know the exact details, except that it said it could be similar to what you see in your 401 k, so that money could still grow into retirement, something that I would bring up as a concern is one of the biggest problems we have with pilots in general, because of the B fund contributions, is that, and regardless of whether they’re making Roth contributions or not, there’s a massive amount of tax deferred money in their 401, K plan. This would only make that problem, you know, compound on that problem, because all we’re doing is deferring these assets, and then you’re going to pay income tax on it later on, and we don’t even know what that bracket is going to be like. You want to comment on that? Or do you have a thought on that? I do.

Zach Smith  04:30

So this is the biggest problem that you and I deal with. I think you have, you have quoted this as the retirement ticking Tax Time Bomb time and time again. This makes that problem a little bit worse. And I know a lot of our pilots, and I get the consistent questions I know you do too, how do I lower what I’m paying in tax today? Well, you and I, over the years, have really developed a strategy of acceleration of income today to reduce tax over the long run. This kind of is in my in my eyes, is somewhat making that problem worse or working against. A strategy that you and I have kind of been operating on for years. And so some of the other things, and we can get into more of this too. Ryan is, you know, when we have large compensation in retirement, a lot of times that income becomes fixed. This will be another item of fixed income, just like Social Security, a potential pension from DFAS for a lot of our guys that are prior military pensions from other airlines and so on and so forth. This becomes another element of fixed income, right? And it’s taxable. It’s all tax deferred, right? So the idea is, yeah, we can reduce some tax today, right, while you’re working, but we’re just kicking the ball down the road, right? Kicking the ball down the road into retirement post 65 which you and I had briefly touched on. This a big problem that I tend to see with our pilots when they hit 65 prior military or not, rolling off TRICARE, rolling off health insurance from the airline when you retire is what’s called Irma, and this is the income Medicare adjustment that they make based on your income. So what we run into a lot with our pilots that have higher income in retirement, fixed or not, pulling from 401, K’s required minimum distributions in our 70s is that these Irma rates can climb quickly, and we inadvertently end up paying a lot of money for Medicare in retirement, and once that income becomes fixed, there’s nothing we can do about it. So the strategy in the long run is, how do we reduce taxable income in retirement. This deferred compensation plan is really increasing that fixed income when we get

Ryan Fleming  06:26

there. Yeah, just it compounds the problem. I feel like we’re fighting all the time. Of course, you know, I understand wanting to reduce taxes today. The way I think about it, though, is you’re going to pay me now, or you’re going to pay me later, absolutely, I think about tax deferral. You know, I always go back to this farm analogy. Where do you want to pay a little bit of tax on this one little kernel of corn, and then it grows tax free for the rest of your life? And then when you take it, it’s tax free. Or do you want to defer the taxes on that? So now you’re growing that kernel of corn into this massive harvest, and then you’re going to pay tax on all of it. And then here’s the part that I don’t like. I don’t have any control over it at all. I have no clue what the taxes are going to be all the way down the line, and I don’t have a lot of comfort with what’s going on in our country, budget wise and everything else. I truly believe taxes are going to have to go up so before we dig into just personal thoughts, I want to just go through the list of negatives that I pulled up. And this, a lot of these are in the frequently asked questions, but we can expand on them. I think we already talked about the company credit risk. Let’s just assume that’s not an issue. Obviously this is beneficial for delta, but I think they’re a great company, very solid. Let’s just assume that’s not a thing. You lose flexibility. You’re gonna have limited access to this money. You’re gonna have forced distribution rates and plans, whether that’s in service or once you retire, either way, you got to pay income tax on it, and it’s got to be a plan that you put in place. And then there’s no ERISA protection. This is not your money. It’s not protected by ERISA. It’s still basically the company’s money. They’re just earmarking it for you. And what I think is the biggest thing that concerns me is that taxation, timing, risk, just the unknown. I don’t know what future tax rates are going to be, what what state you live in is going to be a factor in this. If you’re, you know, not, if you’re in Florida or Texas or some other tax free state, it’d be great, but you might move somewhere else in retirement get hammered on the taxes from this deferred income as well. So I look at it, and I think if you were to take advantage of this, it would have to be very, very strategic. It’d be, have to be very, very well planned amongst your financial advisor and your tax consultant at your CPA, just to making sure it’s right for you. It very well may be right for some people, but I do have concerns overall with the things I see. I don’t know how you feel about

Zach Smith  08:53

1. Yeah, so I want to emphasize something that you said there. We don’t want to make a blanket statement, or I’ll speak for myself here, that this is wrong for everybody. There may be situations where this certainly does make sense. If we’ve got a pilot that already has 90% of their money that is post tax, non qualified money, I think it can make sense for these deferred compensation plans, right? If almost all of their money is going to be post tax anyway, in retirement, this might be a good strategy, but the problem is, especially post contract for a lot of the major airlines, with the Inc the non elective contribution that the airlines are putting in, none of our pilots, essentially, are going to retire with no pre tax money. We’re not going to be able to get away from that.

Ryan Fleming  09:38

I was wondering about that. You said somebody has 90% of their money in post tax I haven’t seen it, not with airline

Zach Smith  09:43

pilots, not in a perfect world, right? Unless we got guys doing major conversions every year of their career. But no, most of the time we’re not going to see, we’re not going to see all post tax money. And it’s almost again in this industry, this is a great problem to have. It’s an absolutely great problem to have. But with Delta putting in. 17% of your compensation. Every penny that delta puts in is going to be pre tax anyway. And if we go down this deferred compensation plan, while it’s not going into the 401 K bucket, we’re still ending up with significant amounts of pre tax income, more or less.

Walter Storholt  10:18

Attention, aviators, when you’ve spent years in the cockpit managing the complexities of flight, isn’t it time you navigated your retirement with the same precision? Introducing retirepilots.com right at your touchdown zone on our homepage, there’s a beacon flashing. Get my free toolkit. Click that, and you’ll be cleared for a direct route to Ryan’s retirement toolkit, tailor made for pilots like you. Inside, you’ll find two of his important works, the pilot’s advisor and pilots retire early. Between these two books, you can decipher the nine critical decisions when retiring before 65 and discover the seven lessons to help pilots land safely in retirement. But that’s not all. This toolkit is packed with altitude, high value, including extras to get your retirement plans off the runway and light the afterburners on your 401 k vector on over to retirepilots.com to grab your toolkit and let’s embark on this journey together.

Ryan Fleming  11:22

Well, and for somebody that’s not a good saver, this is better than not saving the money, because you’re saving the money for somebody that is a good saver, and they’re actually going to, you know, do something prudent with that money. Let me just ask you a scenario that’s going on in my head, and then you can tell me how you feel about it. I would rather, you know, pay the tax, now take the compensation, invest it in a taxable investment account, and then I can have total flexibility with that money, depending on how life happens. That money is going to grow over time. And then, of course, at that point in time, the only tax I’m really going to pay is capital gains tax, whether it’s short term or long term, which I have total control over. It just seems to me, from a liquidity standpoint, from a investment option standpoint, a flexibility standpoint, that’s what I’d rather do with my money versus kicking the can down the street. And then I have no clue what tax brackets are going to look like way down the road, and I know it’s going to be a much larger amount if it does what it’s supposed to do. Do you agree with what I’m saying, or how would you look at that

Zach Smith  12:30

I do? And what I would add to that as well is even if tax rates stayed the same as what they are today, take out the tax rate risk. If tax rates stayed what they were today, I still think our theory applies. I really do, because of the reduced taxable income on the growth in a brokerage account and the in having access to the money, it’s all about having access to the money, right? You control the investments. You control the income. The great thing about the brokerage accounts is we can really, for the most part, as you know Ryan, we can control the income on the account when we recognize capital gains. We can, we can be strategic about tax planning based on how we are going to recognize income. So I don’t know. Is it so much risk of tax rates going up? Because even if they stay consistent, I think our theory still applies. The only thing I would add to that is if we have somebody that’s higher income on the qualification list with Delta if they’re living in some states that have very high state income tax rates, Minnesota, California, states along these lines, where we’re getting into double digit tax rates, sometimes, depending on their retirement plans, it again these, these plans might make sense for certain situations

Ryan Fleming  13:39

well, and I could see where, if you had, you know, pilots, near the end of their career, they’re earning the most money they’ve ever made. They’re getting into the top tax bracket, where you could defer a portion of it to try to lower what bracket you’re going to be in, sure, but you’d have to be very careful, too, because it the way this is set up. If you look at how, how and what’s deferred. You got to make sure that it’s not affecting your 401, K contributions. Like anything else, I feel like the devil’s in the details, it is, and we haven’t seen them all yet. Yeah. And then also the distribution plan that you have to come up with. I don’t see how it ever makes sense to have a distribution plan while you’re still working. I mean, because you should be making more money than you’re going to be making, and then you put more income on top of that. So I wouldn’t really see that as an option unless something bad happened in life and you just needed money at that point in time. But having a really good plan in retirement of one to take those distributions and how much, and it seems like there’s some very specific distribution payment plans that you’d have to look at with withholding rates. And then, of course, you talk about some of the the Irma stuff, which, which would definitely be a conversation piece

Zach Smith  14:53

absolutely well. And I kind of got a kick out of the fact that they said in service distributions are. Permitted or able to be selected. I I know you and I had laughed when you initially talked about this, if we’re trying to defer income in our highest earning income years, why would we simply defer it for two years and then, you know, start taking the money back out right

Ryan Fleming  15:10

away? Yeah, well, and stack it on top of the our highest earning years Exactly,

Zach Smith  15:15

exactly. So I don’t, I don’t think that’s a good strategy, right? If we’re just deferring it until a future year when we’re actually still working and wrapping up our career.

Ryan Fleming  15:23

Yeah, and a lot of these things, I look at it as, like, what do I want to do this? Would I want to do? You know, do this being an airline pilot. And I feel like Delta’s plan, like their 401 k plan, their compensation plan, has had a lot of great things, catch over cap, you know, which a lot of the other airlines didn’t have for a while. That’s definitely something that I want, that, you know, FedEx doesn’t have, well, and the

Zach Smith  15:44

ability to opt out of it. Delta. Delta was the first one out of the gate with the contract, and they gave the pilots the option to opt out of this stuff. So I’m in agreement with you that they’ve got one of the best, one of the best contracts in terms of the retirement side that I’ve seen so far, in all honesty,

Ryan Fleming  15:57

well, and even the market based cash balance plan that delta had. It’s another great option for, you know, more savings, you know, more tax deferred savings. But once again, even that market based cash balance plan, I don’t like it. Why? For many of the same reasons what we’re talking about here exactly, exactly, losing control, losing liquidity, losing flexibility, it is, but

Zach Smith  16:19

still a better plan than what, in my opinion, and what United had offered, we’re on the doorstep of American having a cash balance plan. We don’t know the exact details of being able to opt out and what that actually looks like yet, but I, I believe they’ve got their private letter ruling from the IRS. So Americans moving forward with this. But again, from what I’ve seen, Delta, in my opinion, had the best structure to this

Ryan Fleming  16:39

well and what I care about more than anything else. And yes, I just got a text from one of my American pilots with the new new information about those coming down the pipe is, is savings better than not saving? So if you, if you don’t have any discipline to do that, some of these plans are fantastic, where it almost forces the discipline, where you have more money rolling over into a tax deferred plan. However, I like the fact where delta gave you the option to opt in or opt out. Correct? I would have opted out of the market based cash balance plan for a myriad of reasons, and I think we even talked about those on a podcast we did. And I think it’d be nice if you could opt out of it in the future, if you made the bad decision. You know, in my opinion, of being in the market based cash balance plan. So once again, the flexibility, where you’re not locked in for life. But of course, we don’t control these plans. We just have to look at them and say, hey, does this make sense? Would I want one of my clients to do this? And of course, like anything else, it’s a case by case basis, but I think it’s good for us to at least have a conversation

Zach Smith  17:43

about it. Absolutely, you know, and in a perfect world with these cash balance plans, I would love to see an annual election option where I think it’s what you’re alluding to, where each year we can decide, Hey, are we in? Are we out for this year? And we can change it going forward. We don’t have that right now. I know there’s been some pushback, so we’ll see what happens in the future, maybe the next contract. But in a perfect world, this is what I’d like to see

Ryan Fleming  18:04

absolutely Well, I think it’s great that we got on the podcast to at least discuss this new option that delta is providing to its pilots. Do you have any other things that you want to finish up on or commentary? I think we’ve hit on a lot of it. No, I think we covered

Zach Smith  18:16

a lot of this. I know you, and I wanted to give a good understanding to our pilots of exactly how these things work, and I know there’s going to be some more. To be some more information that’s going to be trickling out. They’ve got a couple webinars, I believe delta is putting on October 14 and 15th. If some of those guys that are interested in this, guys and gals that want to sign up, maybe worth looking at, Ryan and I are certain to be wrapping our hands around this as more details come out. But I think we’ve kind of hit the nail on the head here, and we’ll tackle this as more information

Ryan Fleming  18:42

comes well, Zach, I know it’s getting near the end of tax time. October 15 is coming up. I know you’re very busy. I appreciate you taking the time to get on the podcast with us to talk about this deferred comp plan that delta is offering. And we appreciate you get back to work, work through the 15th, and then hopefully you can have a nice vacation with your your family and decompress a little bit from the hard tax season. Absolutely. Ryan, happy to do it anytime. All right. Well, appreciate it. Everyone Fly safe, and until next time, we’ll see you here on the pilots advisor podcast.

Speaker 1  19:18

Information is for illustrative purposes only, and does not constitute tax investment or legal advice. Always consult with a qualified investment legal or tax professional before taking any action.