What is nonqualified deferred compensation and how is it taxed?

Nonqualified deferred compensation (NQDC) is an arrangement, often offered to executives and high earners, that lets you defer part of your salary or bonus to a future year – usually retirement – delaying the income tax until you actually receive it. The appeal is shifting income out of your peak-earning, high-bracket years into lower-bracket years later, and letting the deferred amount grow tax-deferred. The big risk is that NQDC is an unsecured promise from your employer: unlike a 401(k), the money isn't protected in a trust, so if the company goes bankrupt you become a general creditor and could lose it. Section 409A also locks in your deferral and payout elections rigidly, with steep penalties for changes. Only defer what you can afford to have at risk, and weigh your trust in the company's solvency.