Deferred comp lump sum vs. installments: choosing a payout a few years before you retire

Three payout schedules for one $1 million balance

Start with the numbers. A lump sum puts $423,300 of Sofia's income above the $640,600 single threshold for 37% in 2026. Five or ten installments put none there.

Sofia (hypothetical) is 63, widowed, and the recently retired COO of a regional insurer. She has no plans to work again. Her 401(k) holds $700,000 of former employer stock with a $90,000 cost basis, and in this example she also has $1,000,000 in her former employer's nonqualified deferred comp plan.

Read the table below row by row. The row most people overlook is the third and fourth: over the payout years, ten installments cost $38,952 in extra Medicare Part B premiums, compared with $5,844 for the lump sum, using the 2026 IRMAA table for illustration.

The assumptions are plain: single filer, $80,000 of other income each year, the $16,100 standard deduction, and earnings credited during the payout ignored.

How do installments change the top bracket you reach?

Each installment is ordinary income in the year it's paid, so $100,000 a year on top of $80,000 of other income leaves Sofia $163,900 of taxable income after the $16,100 standard deduction, far below the $640,600 threshold where 37% starts. A $1,000,000 lump sum leaves $1,063,900.

Here's the arithmetic. Lump sum: $1,000,000 + $80,000 = $1,080,000 of income, less $16,100 = $1,063,900 taxable. Subtract $640,600 and $423,300 is taxed at 37%. Ten installments: $100,000 + $80,000 = $180,000, less $16,100 = $163,900 taxable. Nothing near the top.

Other income in a payout year counts too. Sofia's net unrealized appreciation distribution adds $90,000 of ordinary income (the basis of her stock) in the year she takes it, which lifts a ten-installment year from $180,000 to $270,000. That's still well under the line.

Mariner Wealth Advisors models the brackets under current law for each payout year and doesn't bet on a forecast of future tax rates. The full bracket math needs the current IRS brackets, so check them before you rely on any estimate here.

What does the Medicare surcharge add to each schedule?

IRMAA looks back two years at your modified adjusted gross income, so a payout received at 63 determines what Sofia pays for Part B at 65. For 2026, single filers at or below $109,000 of 2024 income pay the standard $202.90 a month, and those at $500,000 or more pay $689.90.

Ten installments keep Sofia's income at $180,000 every year, which falls in the $527.50 tier. That's $324.60 a month above standard, $3,895.20 a year, and over ten years of premiums it comes to $38,952.

The lump sum triggers one year at $689.90, which is $487 a month above standard, or $5,844 extra ($487 × 12). After that, income of $80,000 brings her back to $202.90. Five installments land at $649.20 for five years, $446.30 a month above standard, or $26,778 extra.

So installments win on income tax but cost more in total Medicare surcharge. That's the honest nuance. Price both before you choose, because the tax saved on the lump sum's top slice is far larger than the surcharge, but only if you actually run the numbers.

How long does your money wait on your employer's promise?

A nonqualified plan is an unfunded promise, so any unpaid balance depends on your employer's general credit. After the first payment, $800,000 of Sofia's $1,000,000 is still unpaid under five installments and $900,000 under ten, while a lump sum leaves nothing exposed.

The lump sum ends the exposure on day one, and the proceeds can go into a diversified portfolio rather than staying tied to one company. A separate page covers what happens to deferred comp if the employer goes bankrupt.

Two checks take an afternoon. Read the employer's latest annual report for credit concerns. Then add up how much of your net worth already depends on that company through stock or a pension. Sofia has $700,000 of its stock in her 401(k), so ten years of installments would pile more onto the same name.

Lump sum and installments, side by side

Neither side wins every row. Here is how the trade-offs line up.

Installments aren't automatically better. They keep money tied to one employer for up to ten years and cost more in total Medicare surcharge in this example. Someone with serious doubts about the employer's credit, or with a balance small enough to stay below the top bracket, may be better off with the lump sum.

One more limit: the plan document decides which options exist. Some plans offer only a lump sum or a fixed five-year schedule, and some force a lump sum on small balances.

• Lump sum pros: no employer credit exposure, one Medicare surcharge year, and money you can invest and diversify at once.
• Lump sum cons: in Sofia's case $423,300 is taxed at 37%, and the balance stops growing tax-deferred inside the plan.
• Installment pros: lower brackets each year, possible protection from a former state's tax at ten or more years, and a built-in income stream.
• Installment cons: years of credit exposure, an IRMAA surcharge in every payout year, and a schedule that is hard to change.

How does the choice shift with age, balance size and where you retire?

Age, balance and state each move the answer. Ten installments starting at 63 end at 72, which is three years before Sofia's RMDs would kick in at 75. A $300,000 balance gains little from spreading. Federal law also keeps a former state from taxing qualifying ten-year installments.

Take age first. Sofia, born in 1963, starts RMDs at 75, so ten installments from 63 finish at 72, before RMDs stack on top. Someone retiring at 68 with ten installments would run into RMDs while still being paid.

Balance size matters just as much. For a $300,000 balance, a lump sum on $80,000 of other income gives $363,900 of taxable income, well below $640,600, so spreading saves less. The bracket argument gets stronger as the balance grows.

State tax is the third factor. Federal law bars a former state from taxing nonresidents on nonqualified deferred comp paid in substantially equal payments over a period of ten years or longer. A five-year schedule doesn't qualify. State rules on this income differ widely, so confirm how both your old and new state treat it.

Step by step: making the payout election before the deadline

Five steps, and each has an owner.

Timing rules are strict. A change to an existing election has to be filed no later than 12 months ahead of the original first payment date. It must delay that payment by at least 5 years, and it doesn't take effect for 12 months. Miss that and the old schedule stands.

If you were a specified employee of a public company, payments triggered by separation are delayed six months. Plan cash for that gap.

• You request the plan document and the current election form from HR or the plan administrator.
• Mariner Wealth Advisors lays out each schedule year by year with your other income, Social Security timing and RMD age.
• Our advisors add the IRMAA tier and the unpaid balance for each year.
• You and your tax preparer review the one-page comparison.
• You submit the election and keep the confirmation.

What to do this week, and questions to ask an advisor

Find your current election and its default, which is often a lump sum at separation. Note the date 12 months before your planned first payment. Then list your other income for each payout year, including Social Security and any stock sales.

Treating the payout as a retirement-day choice and letting the default lump sum apply is the costly error. In Sofia's case it puts $423,300 of income in the 37% bracket in one year, and changing it takes a 12-month notice plus a 5-year delay. If a lump sum would push part of your balance above $640,600 single or $768,700 married filing jointly for 2026, price an installment schedule year by year before the deadline.

Bring these questions to any advisor, including Mariner Wealth Advisors, whose team can build the year-by-year comparison from your plan document. Your plan may also interact with concentrated stock and your wider retirement income, so we look at those together. Investing involves risk, including loss of principal.

Request the plan document before the window closes.

• Which bracket does each schedule reach in each year?
• Which IRMAA tier does each payout year set two years later?
• How much of my net worth depends on this employer during the payout?
• Does a ten-year schedule protect me from my current state's tax if I move?
• What happens to unpaid installments if I die?