By Joe Wallin | April 2026 | ~7 min read
If you are a tech executive, senior leader, or high earner in Washington with a nonqualified deferred compensation (NQDC) plan, Washington's new income tax changes your calculus significantly. The decisions you make about deferral elections in the next two years could save — or cost — you hundreds of thousands of dollars.
Here’s the issue: Washington's 9.9% income tax uses federal adjusted gross income (AGI) as its starting point. NQDC distributions are included in federal AGI in the year they are paid to you. That means deferred compensation you earned years ago — possibly when Washington had no income tax — will be taxed at 9.9% when it hits your AGI after January 1, 2028.
This is not a hypothetical problem. It is an immediate planning problem.
How Deferred Compensation Works (Quick Refresher)
A nonqualified deferred compensation plan under Section 409A of the Internal Revenue Code allows you to defer a portion of your compensation — salary, bonuses, or other earnings — to a future date, typically retirement or separation from service.
The key federal tax rules are straightforward. You are not taxed on deferred amounts when earned. You are taxed when the compensation is actually paid to you (or made available). At that point, the distribution is included in your federal AGI as ordinary income. FICA taxes (Social Security and Medicare) generally apply when the compensation is earned or vests, not when it is distributed — so payroll taxes are usually already handled.
The appeal of NQDC has always been tax deferral: push income into future years when you expect to be in a lower bracket. In Washington, this strategy worked beautifully when the state had no income tax. You could defer income indefinitely with zero state tax consequences.
That is no longer true.
The Washington Tax Trap
Washington's income tax, enacted under ESSB 6346, applies a 9.9% tax on "Washington taxable income" exceeding $1 million per individual ($1 million combined for spouses). The tax base starts with federal AGI.
This creates a straightforward problem for anyone with significant deferred compensation:
Income you deferred before 2028 — when Washington had no income tax — will be taxed at 9.9% when distributed after January 1, 2028, to the extent it pushes your AGI above $1 million.
Consider a tech executive who deferred $500,000 per year from 2020 through 2027, accumulating $4 million in deferred compensation (plus investment returns). If that executive takes distributions of $800,000 per year starting in 2029, and has other income of $400,000, their total AGI is $1.2 million. The $200,000 above the $1 million threshold is taxed at 9.9% — a $19,800 annual Washington tax bill on money that was earned in a no-income-tax state.
Scale that up for executives with larger deferrals, and the numbers become painful.
Can You Accelerate Distributions Before 2028?
This is the first question every executive with an NQDC plan asks: can I take my money out before January 1, 2028, when the tax takes effect?
The answer is: it depends on your plan, and Section 409A makes this extremely difficult.
Section 409A imposes strict rules on when deferred compensation can be distributed. You must have elected the timing and form of distribution at the time of deferral (or within the first year of eligibility). Permissible distribution triggers are limited to: separation from service, a fixed date, a change in control, disability, death, or an unforeseeable emergency.
You cannot simply accelerate a distribution because a new state tax is coming. Section 409A prohibits acceleration of payments except in narrow circumstances, and violating 409A triggers immediate inclusion of all deferred amounts in income, plus a 20% penalty tax, plus interest.
However, there are some limited options:
If your plan allows "in-service distributions" on a fixed date, and you have flexibility in setting that date for future deferral elections, you could schedule distributions to fall before January 1, 2028. But this only works for future elections — you cannot retroactively change the distribution date for amounts already deferred.
If you are separating from service before 2028, your plan likely provides for distribution upon separation. Timing your departure before the tax takes effect would allow you to receive distributions in a year with no Washington income tax.
If your plan permits a "subsequent deferral election" under 409A(a)(4)(C), you may be able to re-defer or change the payment schedule — but the new payment date must be at least five years later than the original date, and the election must be made at least 12 months before the originally scheduled payment. This is a tool for extending, not accelerating.
The bottom line: for most executives with existing deferrals, the money is locked in and will be taxed under Washington's new rate when distributed.
The Residency Question
Here’s where the planning gets interesting. Washington's income tax applies to residents of Washington. If you are no longer a Washington resident when your NQDC distributions are paid, Washington cannot tax them — subject to the sourcing rules.
For many executives, this raises the question: should I change my domicile before distributions begin?
Washington's new law includes a 30-day bright-line residency rule and detailed sourcing provisions. If you move to a state with no income tax (like Nevada, Texas, or Florida) before distributions begin, and you properly establish domicile there, your NQDC distributions should not be subject to Washington's 9.9% tax.
But be careful: some income types are sourced to the state where the services were performed, not where the taxpayer lives when paid. For NQDC plans, the sourcing rules vary by state. Many states that tax nonresidents use an "allocation" approach, taxing the portion of deferred compensation attributable to services performed in that state, regardless of where the recipient lives at the time of distribution.
Washington's statute will need DOR guidance on this point. If Washington follows the approach taken by states like New York and California, former Washington residents could still owe Washington tax on the portion of their NQDC attributable to services performed in Washington — even after moving away.
This is an area to watch closely as DOR issues implementing rules.
For a broader look at the residency and domicile question, see How to Change Your Washington Domicile to Avoid the Income Tax and What Happens If You Move Mid-Year?.
What About Qualified Plans (401(k), Pension)?
Washington's income tax starts with federal AGI. Contributions to qualified plans — 401(k), 403(b), traditional IRA — reduce your AGI in the year of contribution, just as they do for federal purposes. Distributions from these plans are included in AGI when received.
This means qualified plan distributions are also subject to Washington's 9.9% tax to the extent they push your AGI above $1 million. For most retirees, this will not be an issue — the $1 million threshold is high. But for executives with large 401(k) balances, pensions, and NQDC distributions hitting in the same year, the combined AGI can easily exceed $1 million.
For more on this, see Is Retirement Income Subject to Washington's 9.9% Income Tax?.
Planning Strategies
Given the constraints of Section 409A, the planning options are limited but real:
Model your distribution schedule now. Project your AGI for each year from 2028 forward, including NQDC distributions, other compensation, investment income, and any expected liquidity events. Identify the years where you will exceed $1 million and by how much.
Maximize pre-2028 distributions where possible. If you have any flexibility in distribution timing — particularly for future deferral elections or if you are considering a separation from service — timing distributions before January 1, 2028 eliminates Washington tax entirely.
Consider reducing or eliminating new deferrals. If you are currently making deferral elections for future years, think carefully about whether continued deferral makes sense in a 9.9% state income tax environment. The federal deferral benefit may still outweigh the state cost if you expect to be in a lower federal bracket at distribution — but run the numbers.
Evaluate a domicile change. If your NQDC balance is large enough, the 9.9% tax on distributions may justify relocating to a no-income-tax state before distributions begin. The break-even analysis depends on your total deferred balance, distribution timeline, and personal circumstances.
Coordinate with other income. If you have control over the timing of other income — capital gains, business distributions, Roth conversions — coordinate those events with your NQDC distribution schedule to minimize the number of years you exceed $1 million.
Watch for DOR sourcing guidance. The treatment of NQDC distributions for former Washington residents is not yet settled. DOR rulemaking on this point could significantly affect the value of a domicile change strategy. Do not make irreversible decisions until this guidance is issued.
The Urgency
The window between now and January 1, 2028 is your planning window. Once the tax takes effect, your options narrow significantly. Section 409A limits your ability to change distribution schedules, and establishing a new domicile takes time and documentation.
If you have a significant NQDC balance and expect to remain in Washington, talk to your tax advisor now — not in 2028.
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
