Can Your Old State Tax Your Deferred Comp After You Move to South Carolina?

Maybe you have Rental properties. A unique insurance policy. Maybe you own a business. Maybe you have stock options. A pension. Or a benefit from an employer that comes with a unique set of rules.

You don’t necessarily need to become an expert on every nuance of your finances. But it’s very important to know which ones deserve a closer look.

Nonqualified deferred compensation is a great example.

This specific example won’t apply to everyone, but the lesson from the example can apply to many people.

With Nonqualified Deferred Compensation plans, a decision you made years ago about how you’ll receive the money could potentially affect which state gets to tax it after you retire.

Let’s simplify how that works.

First, what is deferred compensation?

For highly compensated executives, there are limits to how much they can put into a traditional 401(k). In 2026, the basic employee contribution limit is $24,500. In other words, they are sheltering & deferring that amount from their current tax rate. But do they have more options for deferring additional income on top of that?

That’s where a nonqualified deferred compensation plan, or NQDC plan, can come in.

The concept is fairly simple:

Instead of receiving all of the compensation today at a high tax rate, you can agree to receive some of it later, potentially at a lower rate during retirement.

Depending on the plan, you might defer $100,000 of this year’s compensation until retirement. You generally don’t pay income tax on that compensation until it’s actually paid to you.

The net gain from tax savings can be substantial.

Now let’s say at some point near retirement, you move.

Here’s where this gets interesting.

Suppose you earned your deferred compensation while living and working in California.

Then you retire, move to Myrtle Beach, establish South Carolina residency and start receiving the money.

Who gets to tax it?

You might assume California is out of the picture because you don’t live there anymore.

But that’s not always true.

Federal law generally prevents your former state from taxing certain types of retirement income once you’re a nonresident. Traditional retirement accounts like 401(k)s and IRAs generally receive that protection automatically.

Deferred compensation can receive protection too — but how the payments are structured matters.

For many common NQDC arrangements, electing for annual payments over at least 10 years can shield your plan assets from the higher state’s tax, assuming the timing of your move, the plan, and the payment structure meet the rules.

A lump sum generally doesn’t qualify for that same protection.

Neither does simply choosing nine years instead of ten.

How the payout election lines up with the federal rule

General illustration only. Individual plans and facts vary. Confirm your own situation with your tax advisor.

The reason this works is because there is a federal level law that bars states from taxing former residents on NQDC distributions only if the payout is structured in a certain way.

The important moving parts are: Where you live and work while deferring the NQDC, where you will live in the future when the NQDC is being paid out to you, the plan’s structure, the timing of your retirement, and your distribution timeline election.

And that last piece, your election, may have been made years before you knew where you were going to retire.

Let’s put some numbers around it

Suppose our California executive has accumulated $1.5 million of deferred compensation and is moving to South Carolina.

Route 1: Take the $1.5 million all at once.

That gets the money out of the employer’s plan immediately.

But now she potentially has two tax issues.

First, the lump sum generally wouldn’t receive the federal 10-year protection we’ve been discussing. California may therefore still be able to tax the portion connected to work she performed there.

Second, she just added $1.5 million of income to a single tax year.

After adding Federal & State taxes in California, the tax bill on that $1.5M could come close to 50%.

Now consider another possibility.

Route 2: Receive roughly $150,000 per year for 10 years.

If those payments satisfy the federal requirements, California generally can’t tax the protected income once she’s a South Carolina resident.

Instead of stacking $1.5 million into one federal tax year, she’s spreading that income across ten years in a lower tax state. If that’s the only income for the couple in retirement once they come to South Carolina, the total tax rate for Federal and State could be half of the rate compared to Route 1.

Estimated effective rates on the same $1.5 million, depending only on how it is received.

But notice that I said could.

Maybe she has a pension. Maybe her spouse is still earning $500,000. Maybe she’s selling a business. Maybe there are large investment gains.

All of those things affect the math.

With all that said, the lower-tax answer isn’t automatically the better answer

There is an important difference between a deferred comp plan and a more standard retirement plan like a 401(k). In a 401(k), the money is already yours. (Subject to future taxes when your qualified withdrawal time comes.)

With a typical unfunded NQDC plan, the money remains an unsecured promise from your employer to pay you later. The longer you wait to receive the money, the longer you’re relying on your former employer to ultimately make good on that promise.

The lump sum gets the money out of the deferred compensation plan almost immediately but almost certainly creates a larger tax bill. 10 annual payments might save on the tax bill, but is a longer period to rely on that promise from the employer.

Most people don’t worry about the solvency of their former company. And I wouldn’t say it’s a common risk. But some companies may be more resilient than others. And crazier things have happened.

Ideally, we’re trying to find the decision that makes the most sense when taxes, risk, investments, cash flow and the rest of the retirement plan are considered together.

Five things to do before you retire

If you have deferred compensation, start here:

1. Pull your plan documents and payout election.

Find out what you actually elected and when the money is scheduled to arrive.

2. Find out what type of plan you have.

There are different types of deferred compensation arrangements, and some receive different treatment. Your HR department or plan administrator is a good place to start.

3. Review the payout options carefully.

Don’t assume the lump sum, five-year payout or ten-year payout is automatically best. Taxes are only one part of the decision.

4. Look at the entire retirement tax picture.

Deferred comp may overlap with Social Security, pensions, Roth conversions, investment gains, business income. (Even if some of those things are future considerations). What looks good by itself can look very different when everything is stacked together.

5. Don’t wait until the year you retire.

Deferred compensation elections can be difficult to change. If you’re thinking about retirement or moving to another state, review the rules well in advance.

The bigger lesson

You may have read this far and thought, I don’t have deferred comp.

Fair enough.

But you might have your own version of a similar problem.

Maybe it’s a pension with several payout options. Maybe it’s company stock inside a 401(k) (this could open up Net Unrealized Appreciation options). Maybe it’s deciding when to sell a business. Maybe it’s stock compensation, a rental property, an inherited IRA or an insurance policy you bought 20 years ago.

Finances can get complex. There are many stones to overturn to optimize opportunities and avoid potential mistakes.

No one needs to memorize every rule.

But I encourage you to ask yourself this question.

Have I considered my options correctly?

Can my former state tax my deferred compensation after I move?

It can, depending on how the money is paid out. Federal law limits a state’s ability to tax a former resident’s retirement income, but nonqualified deferred compensation only receives that protection when the payments are structured to meet specific requirements.

What is the 10-year rule for deferred compensation?

For many common NQDC arrangements, substantially equal payments made at least annually over a period of at least 10 years can qualify for federal protection from the former state’s tax. Payments for life or life expectancy can also qualify.

Does a lump sum payout qualify for the protection?

Generally no. A single payment is not a series of periodic payments, so the state where the compensation was earned may still be able to tax it.

Is nine years of payments close enough?

No. The threshold is a floor, not a target. Nine annual payments generally do not qualify.

Is a longer payout always the better choice?

No. With a typical unfunded plan, the balance remains an unsecured promise from your employer. A longer payout lowers the tax bill but extends how long you depend on that promise.

Does South Carolina tax deferred compensation?

South Carolina taxes the income of its residents. The question this article addresses is whether your former state can also tax it, which is where the payout structure matters.

When should I review my deferred comp election?

Well before the year you retire. These elections can be difficult to change once made.

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Jeremy Finger, Founder

Jeremy grew up in Nichols, South Carolina, where fishing with his dad sparked a lifelong interest in how money shapes our lives. Since becoming a financial advisor in 1996, he’s helped people navigate life’s biggest moments—and today, with Riverbend, he offers a calm, personal approach that helps clients focus on what matters.

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