A Retirement Plan Option for Highly-Compensated Executives

The 401(k) contribution limit is $22,500 in 2023, which rises to $30,000 for workers over the age of 50. From the standpoint of using retirement savings to replace income later in life, $30,000 a year works reasonably well for most Americans.

But not for highly-compensated employees and executives.

That’s where “Top Hat” plans can come into play. These plans are designed to give key executives and highly compensated employees of a company the opportunity to accumulate enough savings to replace a significant portion of their pre-retirement income.  

Current tax law allows executives to defer up to 100% of their compensation without paying income tax on that money until it is withdrawn, generally in retirement. Much like money in a 401(k) plan, the assets can also benefit from tax-free growth.