Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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Updated July 29, 2026. Quick answer: The safe harbour has a hard edge. 4 U.S.C. §114(b)(1)(I)(i)(II) requires payments over “a period of not less than 10 years.” Nine years earns no partial protection — the income simply falls outside the definition and the former state may tax all of it. Five years and one year are in exactly the same position.
The cliff
| Payout period | Protected by §114? |
|---|---|
| 1 year (lump sum) | No |
| 5 years | No |
| 9 years | No |
| 10 years | Yes |
| 15 years | Yes |
Nine and ten are the same amount of money spread over almost the same period, with completely different state-tax outcomes. There is no proration, no partial credit, and nothing in the statute that softens the boundary. Five-year payouts are extremely common in nonqualified plans, which means a very large number of people are on the wrong side of a line one year away.
Deferred pay is worth a second opinion before it starts
How a payout is structured, and when it begins, interacts with the rest of the retirement picture, and an adviser can look at the whole arrangement alongside the accounts and the timing before anything is elected.
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What the payments themselves have to look like
Not just long enough — substantially equal, and made not less frequently than annually. The statute does allow adjustments to cap total disbursements under a predetermined formula, or for cost-of-living increases, without failing the test. Beyond that, an irregular schedule is a risk even if it runs past ten years.
If you are choosing a schedule now and there is any chance you will move to a lower-tax state before it pays out, ten years is not a preference — it is the difference between protected and exposed. And it is far easier to elect at deferral than to change later.
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.