Updated July 29, 2026. Quick answer: Federal law protects deferred compensation from your former state only if it is paid as substantially equal periodic payments over at least ten years — or comes from an excess-benefit plan. A lump sum, or a five-year payout, is not protected. California can still tax it after you move to Nevada, and the election that decided this was filed years ago.
What the statute protects and what it does not
The federal rule in one sentence. 4 U.S.C. §114(a) provides that “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.” But for a nonqualified plan, §114(b)(1)(I) counts the income as protected “retirement income” only if it is part of substantially equal periodic payments made over the recipient’s life or “a period of not less than 10 years” — or if it comes from an excess-benefit plan.
| How your deferred comp is paid | Protected from the former state? |
|---|---|
| Substantially equal payments over 10 years or more | Yes |
| Payments over your life or life expectancy | Yes |
| From a plan maintained solely to exceed the qualified-plan limits | Yes — regardless of schedule |
| Lump sum | No |
| Installments over fewer than 10 years | No |
The cruelty of the design is the timing. The payout schedule is chosen at deferral — often a decade or more before you retire, before you have any idea where you will live. And under IRC §409A it is extremely difficult to change afterwards. By the time the state-tax consequence becomes visible, the decision is generally closed.
What is protected without any schedule condition
The ten-year test applies only to nonqualified plans under subparagraph (I). Qualified trusts, SEPs, 403(a) and 403(b) annuities, IRAs, 457 plans and governmental plans are listed separately in §114(b)(1)(A) through (H) and carry no payout-duration condition at all. Your 401(k) is safe whatever you do with it. Your deferred comp is not.
The two states most likely to pursue it handle the arithmetic in completely different ways.
Run your own numbers. Inherited IRA drawdown calculator — shape the ten-year drawdown.
Sources
4 U.S.C. §114(a) and §114(b)(1), including subparagraph (I) and its clauses (i) and (ii); IRC §3121(v)(2)(C); IRC §409A(a)(2)(A) and (a)(4)(C); IRC §415 and §401(a)(17). All read July 2026.
This states what the cited authority says. It is not tax advice, and retirement-plan design turns on facts about your business and your other entities that no page can see. Every dollar limit referenced here is indexed and changes annually.