Laid off, 52, hobby business, retire!?

[KathyL]

Hi,
Got laid off from my day job, research biologist, am 52, saved all my life, have a profitable small business/hobby, two college bound kids (13&16), working spouse. I am surprisingly unconcerned about getting another job. What I am concerned about is how to protect my severance package from taxes. I am looking into a SEP (self employed pension).

Where should I put the severance? Stocks are too uncertain, CDs' rates are miniscule...

[ziggy29]

This is the conundrum. When everyone is afraid of stocks, the return on "safe" stuff tends to be horrible and it feels like there are NO good options.

I don't think there's much you can do to shield the severance pay from taxes. It is considered earned income, I think, and if so you can use it to fully fund two IRAs (possibly Roths if you're under the income limit for them). At 52 you could put in $6000 for 2009, and if your spouse is also over 50 then there's another $6000 for them.

If your termination requires that you do something with a lump sum cash-out of a pension, that can (and usually should) be generally rolled into an IRA with no tax consequences (making sure the check is made out to the IRA custodian and not you directly).

[Bestwifeever]

We were able to roll over most of DH's severance (8 months salary equivalent) as a before-tax lump sum into our IRA. We did exactly what Ziggy's last paragraph says. The information about how he could receive the severance was in the paperwork from his company.

Where to put it? Within the IRA at Vanguard, we split it between (pssssst... ) Wellesley and Wellington. Both are down somewhat since then but both pay dividends that have made up for some of the downturn.

And PS--welcome to the boards! And to early retirement!

[kyounge1956]

I'm not absolutely sure, but I think it would also be possible for you & spouse to put in another $6K each for last year, if done prior to April 15, unless you already contributed to a Roth for 2008.

[Dawg52]

Quote:

Originally Posted by KathyL Hi, Got laid off from my day job, research biologist, am 52, saved all my life, have a profitable small business/hobby, two college bound kids (13&16), working spouse. I am surprisingly unconcerned about getting another job. What I am concerned about is how to protect my severance package from taxes. I am looking into a SEP (self employed pension). Where should I put the severance? Stocks are too uncertain, CDs' rates are miniscule...

If you want safe, it's cd's. If you can stand to step up the risk, Vanguard's Wellesley. Maybe go 50/50 with those two which would only net out to about 18% in stocks. Wellesley is yielding 5.5% and 1 year cd's about 1.5% so the net would give you 3.5% with a very conservative portfolio. Not terrible.

[Rich_by_the_Bay]

If your priority is safety and predictability rather than total returns, you might explore single premium fixed annuities. I and most here are not big fans of this alternative because of high fees, lack of inflation protection (unless you pay heavily for it) and survivorship questions about the insurance carrier. Don't know what they are paying now, but probably in the high 3 or 4% range.

For some it works.

[CuppaJoe]

Welcome to the forum, KathyL. Low returns/safety seems to be the name of the game these days.

I got a small bonus when I retired which was in the form of a gift, not taxable. Apparently your severance is taxable; SEP sounds like a good idea to look into and an IRA for some of it. It would be interesting to see if you can do both in the same year.

You are in a good place despite being laid off. I'd be curious to hear about your hobby/business.

[target2019]

Quote:

Originally Posted by KathyL Hi, Got laid off from my day job, research biologist, am 52, saved all my life, have a profitable small business/hobby, two college bound kids (13&16), working spouse. I am surprisingly unconcerned about getting another job. What I am concerned about is how to protect my severance package from taxes. I am looking into a SEP (self employed pension). Where should I put the severance? Stocks are too uncertain, CDs' rates are miniscule...

You won't be able to safeguard the severance from taxes by using a SEP. But you can contribute up to 20% of your self-employment profit to a SEP. Your joint income is what will determine what's best, SEP, or plain IRA. Hopefully your tax planner/preparer is on their game, and can help you minimize tax burden.

SEP is Simplified Employee Pension.