Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Taxation of Retirement sweeteners?
Old 05-24-2018, 11:53 AM   #1
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Taxation of Retirement sweeteners?

If a Megacorp offers an employee a "lump sum payment" of N-months of their salary to retire, does anyone know the tax consequences of this?

I know that DB pensions that are converted to "Lump Sum" payments can be rolled into an IRA and taxes managed accordingly.

The thing is that in the case mentioned above, the pension plan does not appear to be directly involved -- it sounds more like a salary continuation type of offer.

But on the other hand, they they use the Lump Sum terminology and the money apparently is all paid at once as opposed to over several months.

If anyone has any direct experience with the tax options of when an N-month of salary Lump Sum is offered in exchange for retirement, I would like to hear your thoughts on the taxation options that are offered, if any.

Thanks in advance
-gauss
__________________

gauss is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-24-2018, 12:06 PM   #2
Full time employment: Posting here.
 
Join Date: Mar 2013
Location: Coronado
Posts: 772
DH and I have both had lump sum severance packages equal to multiple months of our salaries. DH's was specifically an inducement to separate and reduce headcount (company doesn't have any retirement benefits, so they don't really care what you do after you leave); one of mine was a surprise after I resigned and the other was a promised bonus for staying until the company finished shutting our office. In all cases, the total amount was treated as wages on our W2s and taxes were withheld at the same rate as for bonuses.
__________________

cathy63 is offline   Reply With Quote
Old 05-24-2018, 12:22 PM   #3
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Home Sweet Home
Posts: 26,677
Quote:
Originally Posted by cathy63 View Post
In all cases, the total amount was treated as wages on our W2s and taxes were withheld at the same rate as for bonuses.
This is how I understanding it as well. Any additional salary they give you is taxed immediately as regular income.
MichaelB is offline   Reply With Quote
Old 05-24-2018, 12:47 PM   #4
Recycles dryer sheets
 
Join Date: Dec 2017
Location: Honolulu
Posts: 330
Not quite the same, but when I left my last company, they paid out some 479 hours of accrued vacation time in lump sum in the last paycheck (equivalent of 12 week's pay). I had the company prorate the federal and state income taxes so that they did not over-withhold. They did take out 401(k) contributions of $3794 from one paycheck, rather than the normal $684.
HNL Bill is offline   Reply With Quote
Old 05-24-2018, 01:01 PM   #5
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Excellent feedback.

My main concern is with the actual taxation (any chances for tax deferral etc.) and not so much with the withholding. My interest is coordinating with Roth conversions etc. and managing my tax bracket.

This is much more important now than recharacterization of conversions are no longer allowed. Really glad that I did not yet do a Roth conversion this year.

-gauss
gauss is offline   Reply With Quote
Old 05-24-2018, 01:02 PM   #6
Dryer sheet wannabe
 
Join Date: Mar 2016
Location: Galena
Posts: 14
I took an Early Retirement Incentive from a former employer. It was part of a program to reduce heads. They gave 14 months of pay that was tax deferred. I rolled it into an IRA.
__________________
I can resist everything except temptation. Oscar Wilde
fleefromhome is offline   Reply With Quote
Old 05-24-2018, 01:06 PM   #7
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,428
Quote:
Originally Posted by fleefromhome View Post
I took an Early Retirement Incentive from a former employer. It was part of a program to reduce heads. They gave 14 months of pay that was tax deferred. I rolled it into an IRA.
__________________
Swing hard, look up
Big_Hitter is offline   Reply With Quote
Old 05-24-2018, 01:13 PM   #8
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Home Sweet Home
Posts: 26,677
Quote:
Originally Posted by gauss View Post
Excellent feedback.

My main concern is with the actual taxation (any chances for tax deferral etc.) and not so much with the withholding. My interest is coordinating with Roth conversions etc. and managing my tax bracket.

This is much more important now than recharacterization of conversions are no longer allowed. Really glad that I did not yet do a Roth conversion this year.

-gauss
It would be nice to defer the lump sum to the following tax year. Not only do you get a (potentially) lower bracket, you also get another year of IRA contribution.
MichaelB is offline   Reply With Quote
Old 05-24-2018, 01:36 PM   #9
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Quote:
Originally Posted by MichaelB View Post
It would be nice to defer the lump sum to the following tax year. Not only do you get a (potentially) lower bracket, you also get another year of IRA contribution.
Hmm.. Maybe if it is considered "compensation" in the follow year then it could be deferred into the 401k? (but that would only account for the first 25,000 or so tax deferred).

Perhaps that, or something similar, is how fleefromhome, above, was able to defer taxation of the income.

-gauss
gauss is offline   Reply With Quote
Old 05-24-2018, 02:04 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Location: Kerrville,Tx
Posts: 3,142
Quote:
Originally Posted by gauss View Post
Hmm.. Maybe if it is considered "compensation" in the follow year then it could be deferred into the 401k? (but that would only account for the first 25,000 or so tax deferred).

Perhaps that, or something similar, is how fleefromhome, above, was able to defer taxation of the income.

-gauss

That depends on the company. When I left the megacorp in 2004 they allowed one to defer the severance and/or divide it into 2 or 3 chunks for the following years. The law changed after that so it is not clear how it works. One thing to consider if you can, will you have 35 years of SS earnings? If not deferring will make the amounts taxable but add to the average earnings for SS.
meierlde is offline   Reply With Quote
Old 05-24-2018, 02:34 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Sep 2014
Location: Grapetown
Posts: 1,248
Quote:
Originally Posted by fleefromhome View Post
I took an Early Retirement Incentive from a former employer. It was part of a program to reduce heads. They gave 14 months of pay that was tax deferred. I rolled it into an IRA.
DW took a early retirement incentive, 5 equal payments to her 403b for 5 years. Not enough to make us rich, but enough to make it worthwhile.
Winemaker is offline   Reply With Quote
Old 05-24-2018, 02:37 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 3,150
Over a decade ago, I got a 6 mo package. It all got on the W2 for that year so all was taxed currently, no deferral that I can recall.
kaneohe is offline   Reply With Quote
Old 05-24-2018, 03:11 PM   #13
Full time employment: Posting here.
 
Join Date: Jun 2017
Location: Western NC
Posts: 708
Quote:
Originally Posted by fleefromhome View Post
I took an Early Retirement Incentive from a former employer. It was part of a program to reduce heads. They gave 14 months of pay that was tax deferred. I rolled it into an IRA.
Wish I could rewind the clock ~20 years and go to work for a different employer...
ncbill is offline   Reply With Quote
Old 05-26-2018, 02:24 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 2,043
It depends on the company and how they characterize the distribution.
Scuba is offline   Reply With Quote
Old 05-26-2018, 05:20 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 4,511
My only caution would be if you do not plan to re-enter the workforce and instead plan to RE. In that case, I'd consider if the money you might dump into an IRA/401K might be put to better use in an after tax position. (think: ACA)

I was able to stretch my lump sum by setting aside what I would've put into my IRA into a standby account. Gave me a nice bridge into RE when finding a new job became a non-starter.

With 80% of my portfolio in pre-tax, I do wish sometimes that I had more in my after tax account; and no, my tax bracket didn't change after I RE'd.

If you plan to hang it up, I'd think about just paying the tax and be done with it.

JMHO.
__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko is offline   Reply With Quote
Old 05-26-2018, 06:14 AM   #16
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 3,800
I got a signing bonus once that had similar tax treatment (pretty much ordinary W-2 income). I deferred taxes on most of it by putting into a donor-advised fund at Fidelity since I have enough deductions to itemize. It was still part of my AGI, of course, and subject to SS/Medicare taxes, but I avoided state and federal taxation. May not work for you if the amount is more than you can see yourself donating to charity over a reasonable number of years or if it exceeds the limitations on charitable deductions (some large % of AGI I've never hit).
athena53 is offline   Reply With Quote
Old 05-26-2018, 08:40 AM   #17
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Quote:
Originally Posted by Scuba View Post
It depends on the company and how they characterize the distribution.
Yes - but under what conditions could the company choose to characterize it as something that could be rolled over/deferred to a 401k/IRA?
gauss is offline   Reply With Quote
Old 05-26-2018, 08:42 AM   #18
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Quote:
Originally Posted by athena53 View Post
I got a signing bonus once that had similar tax treatment (pretty much ordinary W-2 income). I deferred taxes on most of it by putting into a donor-advised fund at Fidelity since I have enough deductions to itemize. It was still part of my AGI, of course, and subject to SS/Medicare taxes, but I avoided state and federal taxation. May not work for you if the amount is more than you can see yourself donating to charity over a reasonable number of years or if it exceeds the limitations on charitable deductions (some large % of AGI I've never hit).
Thanks for the suggestion.

I made a fairly large DAF contribution last year before the new tax law went into effect.

Going forward, I don't thing we will be able to itemize very often, if ever.

-gauss
gauss is offline   Reply With Quote
Old 05-26-2018, 08:53 AM   #19
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 2,107
Quote:
Originally Posted by marko View Post
My only caution would be if you do not plan to re-enter the workforce and instead plan to RE. In that case, I'd consider if the money you might dump into an IRA/401K might be put to better use in an after tax position. (think: ACA)
Thanks for the suggestion.

I have been out of the w*rkforce since 2012, and DW will likely be voluntarily leaving for good soon too. She was already planning to RE this year and the retirement sweetener is just icing on the cake.

We have mid six figure sums in Roth IRAs, which have already been taxed (ie contribution and conversion basis), that are available to get us to age 59 1/2 for any expenses beyond anything that her pension will cover.

In our case, I am not sure there would be any advantage of taking the tax hit all at once if other options are available.

-gauss
gauss is offline   Reply With Quote
Old 05-26-2018, 09:55 AM   #20
Full time employment: Posting here.
 
Join Date: Mar 2013
Location: Coronado
Posts: 772
Quote:
Originally Posted by gauss View Post
Yes - but under what conditions could the company choose to characterize it as something that could be rolled over/deferred to a 401k/IRA?
The max annual combined contribution to a 401k is $55k. That's the combined total of what the company can put in plus what you can put in. There is no legal way to defer more than that amount in a 401k, and the plan documents would have to be written so that the company can make that max contribution for you without requiring them to do so for the others who participate in the plan.

If your severance is going to exceed $55K minus whatever you have already contributed to the 401k this year, it either has to be spread over multiple years or it has to be put into a different type of ERISA compliant plan. Is there a partnership plan, a pension, or anything like that they could use? If not, are they willing to keep you on as an employee and pay out the severance over multiple years so you can defer 100% of it into the 401k? If they want you to retire, I'm guessing they won't go for it, but that may be worth asking.

Other than those options, what about having them pay it in annual payments over several years and report it on a 1099? You could put it on schedule C as self employment earnings and contribute to a solo 401k or IRA.
__________________

cathy63 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Warning about dogs and artificial sweeteners jabbahop Other topics 9 12-01-2015 10:46 AM
Antacid tablet without sugar or artificial sweeteners? John Galt III Health and Early Retirement 30 03-25-2015 07:13 AM
Taxation in a roving retirement TresBelle65 FIRE and Money 6 10-07-2014 06:27 PM
Taxation abroad in retirement Ed_The_Gypsy FIRE and Money 32 12-12-2011 07:27 PM
State Taxation on Pensions and S.S. maddythebeagle FIRE and Money 5 07-25-2005 03:41 PM


 
All times are GMT -6. The time now is 04:01 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.