Disability workers comp and possible roth conversions

[hopefullyoneday]

I have been off all year so far with extended covid issues. It is covered under workmans comp so my work is still paying me. I will be going back to work soon and have a few questions. I have heard that the disability earnings i have gotten so far wont be taxable income. I am just throwing numbers out there to make it simple so here it goes. If i make 100k on disability then go back to work here shortly and make a additional 40k but throughout the year i have been contributing to my mandatory pension and my 457 pre tax and lets say those together total 40k would my taxable income now be zero? I will be retiring here in a few years and would like to do the trad to roth conversions soon and take advantage of this possibly low taxable income year. Or am i missing something? Thanks

 

[rothlev]

I have been off all year so far with extended covid issues. It is covered under workmans comp so my work is still paying me. I will be going back to work soon and have a few questions. I have heard that the disability earnings i have gotten so far wont be taxable income. I am just throwing numbers out there to make it simple so here it goes. If i make 100k on disability then go back to work here shortly and make a additional 40k but throughout the year i have been contributing to my mandatory pension and my 457 pre tax and lets say those together total 40k would my taxable income now be zero? I will be retiring here in a few years and would like to do the trad to roth conversions soon and take advantage of this possibly low taxable income year. Or am i missing something? Thanks

workman's compensation is not taxable income. 3rd party sick pay can be taxable or not taxable depending on whether you or the employer paid for the policy. so, if the payments are workman's comp payments yes, that appears correct. If you are being paid thru 3rd party sick pay you need to check with HR.

 

[hopefullyoneday]

workman's compensation is not taxable income. 3rd party sick pay can be taxable or not taxable depending on whether you or the employer paid for the policy. so, if the payments are workman's comp payments yes, that appears correct. If you are being paid thru 3rd party sick pay you need to check with HR.

Ok, thank you. I am being paid directly from my work. Another question you can possibly answer is i looked at the numbers more closely and i have been contributing to my 457b plan pre tax all year so far. I get to double down on it because of where i work so that means i can pay up to 2x the contribution limit. I googled and could not find a answer for my exact situation being in Texas. So that means i can contribute up to 41k and so far i have been maxing that out in equal payments from each paycheck. If i do go back to work soon it looks like i may need to work some overtime to get paid a regular working paycheck to reach 41k by the end of the year. Or can my workmans comp that i get directly from the city pay for my 457b if i dont get enough actual working (non workers comp) pay. Thanks

 

[rothlev]

Ok, thank you. I am being paid directly from my work. Another question you can possibly answer is i looked at the numbers more closely and i have been contributing to my 457b plan pre tax all year so far. I get to double down on it because of where i work so that means i can pay up to 2x the contribution limit. I googled and could not find a answer for my exact situation being in Texas. So that means i can contribute up to 41k and so far i have been maxing that out in equal payments from each paycheck. If i do go back to work soon it looks like i may need to work some overtime to get paid a regular working paycheck to reach 41k by the end of the year. Or can my workmans comp that i get directly from the city pay for my 457b if i dont get enough actual working (non workers comp) pay. Thanks

Workman's comp would not be considered earned income, it does not come out on a w2. 3rd party sick pay does come out on a w2 and would be considered earned income for deferrals ( 457, 401k , )etc... an does also qualify for earned income credit if you fall into that catagory due to your lower income

 

[cathy63]

Ok, thank you. I am being paid directly from my work. Another question you can possibly answer is i looked at the numbers more closely and i have been contributing to my 457b plan pre tax all year so far. I get to double down on it because of where i work so that means i can pay up to 2x the contribution limit. I googled and could not find a answer for my exact situation being in Texas. So that means i can contribute up to 41k and so far i have been maxing that out in equal payments from each paycheck. If i do go back to work soon it looks like i may need to work some overtime to get paid a regular working paycheck to reach 41k by the end of the year. Or can my workmans comp that i get directly from the city pay for my 457b if i dont get enough actual working (non workers comp) pay. Thanks

It's hard for someone from outside to answer this because there are a lot of things that are specific to your situation. I recommend making an appointment to talk with a benefits specialist in your HR department. Ask about each type of pay you've received this year and whether it is considered "includible compensation" for 457b contributions.

You cannot defer more than 100% of your includible compensation, so if you don't have $41K that falls in the includible category you need to find a way to get up to that amount. If you don't have enough compensation and still defer $41K, the plan has to return those funds plus earnings to you by April 15, 2023 and your employer has to issue a corrected W-2 for 2022 to include the amount returned.

 

[hopefullyoneday]

It's hard for someone from outside to answer this because there are a lot of things that are specific to your situation. I recommend making an appointment to talk with a benefits specialist in your HR department. Ask about each type of pay you've received this year and whether it is considered "includible compensation" for 457b contributions.

You cannot defer more than 100% of your includible compensation, so if you don't have $41K that falls in the includible category you need to find a way to get up to that amount. If you don't have enough compensation and still defer $41K, the plan has to return those funds plus earnings to you by April 15, 2023 and your employer has to issue a corrected W-2 for 2022 to include the amount returned.

Unfortunately my hr, payroll, and work is the problem and why i am in this pickle. My paycheck from work says disability supplement and the dollar amount next to it. Then further down it has my pretax deductions such as 457b, pension, hsa, dental. Then further down it has a spot for YTD gross earnings (which is every dollar the have paid me this year) then a spot next to that and it say Federal taxable gross which equals my YTD gross minus the pre tax deductions i mentioned above. For example YTD gross equalls 100k and federal taxable gross is 60k. Work has been taking out fed taxes all year even though i have been off all year workmans comp. They know they have a glitch in the payroll system but are unwilling to fix because of the cost to fix so they tell us to take care of it when taxes are being prepared. This is the only time i have ever been on workmans comp so i did not know any of this and figured people were doing their job but i guess not. I figure HR should have called me and told me once i went on workers comp that i may have a problem when it comes to my 457b contributions and to keep a eye on it, but they did'nt and have not returned my phone calls as of yet.