Tax Question about Retirement Bonus.

[spudowns]

I turned 60 this year and will retire from a large company with a pension and 34 years of savings with a 50%match. I know I'm lucky to be in this enviable position. Now as luck would have it, the company offered me a bonus of $50,000 to retire before 2013 which I have accepted. Now my question... Does anyone know how to invest this extra 50,000 so it will not get taxed as 2012 income? I believe in paying my share of taxes but I hate to think of the chunk I'm going to owe on this. I would like to put it somewhere for now and get it out sometime in the future when I'm on a pension income. Thx Spudowns.

 

[Packman]

Your employer will need to withhold taxes on this payment, with exception of a 401k contribution. If you have not already contributed to a deductible IRA (assuming you qualify), you can put $6,000 (or 12k with a spousal IRA) there. Otherwise, I don't know of any other way to avoid taxes.

 

[pb4uski]

You should see if your employer is willing to defer payment of the $50k bonus until January 1, 2013 (or defer your retirement/resignation to Jan 1, 2013). Since individual taxpayers are on a cash basis, the bonus would be income in the year you receive it and would be reflected on your 2013 W-2 and 2013 tax return.

Since it also starts a new year, you can then have them withhold $23k as your 2013 401k contribution so your W-2 income for 2013 would only be $27k rather than $50k.

You might have them do the same thing with any unpaid vacation, which moves that income into 2013 as well.

I stopped working in Dec 2011 but was "on vacation" until February 2012. It had the effect of moving that income from 2011 when I had a high marginal tax bracket to 2012 where my taxable income will be zero. I also pick up another two months of 401k match and company subsidized health insurance.

 

[rothlev]

If you haven't maxed out your 401k increase the contributions to max it out by the end of the year.

If you qualify for a deductible IRA and are married you can defer another 12k there

If you have a spouse that works, have her max out any 401k she has also.

 

[Bestwifeever]

DH received a lump sum equal to 1 year's salary and just rolled it over pretax into his Vanguard IRA--doing. an IRA rollover was one of several options on the paperwork, he didn't do anything special to be able to handle it this way. Maybe you'll have that available to you?

 

[Midpack]

You should see if your employer is willing to defer payment of the $50k bonus until January 1, 2013 (or defer your retirement/resignation to Jan 1, 2013). Since individual taxpayers are on a cash basis, the bonus would be income in the year you receive it and would be reflected on your 2013 W-2 and 2013 tax return.

+1, my first thought as well...

 

[MooreBonds]

You should see if your employer is willing to defer payment of the $50k bonus until January 1, 2013 (or defer your retirement/resignation to Jan 1, 2013). Since individual taxpayers are on a cash basis, the bonus would be income in the year you receive it and would be reflected on your 2013 W-2 and 2013 tax return.

While it's true that individual taxpayers are on a "cash basis", it more depends on when the company closes their books. For example, my smallish employer has the last annual pay period ending December 15, so your earnings from December 16-December 31 are accounted for on the company's (and your) following year record.

The bigger issue is that the OP mentioned the company was urging them to retire before 2013...meaning, they likely are wanting to take as many charges as possible for 2012 fiscal year (by paying the OP as much as they can in 2012, which will force up their income), which is why they're offering an incentive to move it up. So, odds are, they're looking to allocate all of the OP's income/bonus/etc in 2012 as they can.

The only ways I can think of (some of which have been mentioned by other posters)

-Max out your traditional 401k contributions for 2012, including the over-50 extra amount.
-start a high deductible health insurance plan for you (and spouse/family?). You can divert $3,100 for individual/$5k+ for a family plan to a Health Savings account, get the tax deduction, and have future earnings from the HSA be tax-free.
-If you had contributed funds to a ROTH 401k in 2012, talk to your HR person to see if you can recharacterize/withdraw them out and have them redirected 100% to your traditional 401k for 2012
-If your local county allows you to, pre-pay any taxes you can in 2012 that would be due in 2013.
-Max out any unrealized losses from your investments to make sure you have a net $3k capital loss to offset against your other taxable income (and don't forget to have a bit of 'extra' losses realized to offset those those last-minute capital gain distributions from your mutual funds/ETFs/CEFs, especially given the rise in equities over the past 18 months)

Also, see if there are any other 'perks' you can negotiate in lieu of part of the bonus, such as:
-Health club membership...see if they can offer you (+ significant other?) a few years pre-paid access to a health club that you would otherwise pay for with after-tax dollars. The company should still be able to write it off (so they should be indifferent), while you don't pay income/SS/Medicare taxes on it.
-Health insurance...same as the health club, see if company will pay a few years of health insurance coverage for you.
-Conference trips...are there any trips your company could justify sending you on for a conference that are in areas you'd like to vacation in? Have them pay for the flight and some hotel room nights to send you out there, and then stay a few extra days on your own...you'd be able to enjoy a trip without having to pay for the flight or as many nights in the hotel, and have the company pick up some meals during your 'conference' time.
-Other perks...are there any other non-cash perks the company could offer, like a company car, company gas cards, etc.?

For any of the above, make sure you get any such deals in writing, signed by the HR department and a big wig.

 

[pb4uski]

While it's true that individual taxpayers are on a "cash basis", it more depends on when the company closes their books. For example, my smallish employer has the last annual pay period ending December 15, so your earnings from December 16-December 31 are accounted for on the company's (and your) following year record.

The bigger issue is that the OP mentioned the company was urging them to retire before 2013...meaning, they likely are wanting to take as many charges as possible for 2012 fiscal year (by paying the OP as much as they can in 2012, which will force up their income), which is why they're offering an incentive to move it up. So, odds are, they're looking to allocate all of the OP's income/bonus/etc in 2012 as they can......

Actually, assuming that your employer is on the accrual basis, they would record an expense (and a deduction for tax purposes) and a liability for the value of your earnings from Dec 16 - Dec 31, but it isn't income for you until the following year when you receive it.

The beauty of the employer being an accrual basis reporter and taxpayer and the retiree being a cash basis taxpayer in that both parties can get what they want. The employer can accrue the liability to the retiree because it is a legal obligation at December 31, 2012 and then make payment in January 2013 and since the retire is cash basis, the bonus is 2013 income when received by the retiree.