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Old 10-29-2015, 04:53 PM
 
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I will be taking an early retirement package that entails one years pay. I have been with the company for 34 years. I am hearing that there can be no 401K contribution or match on the severance dollars. Not happy if that is the case. Any thoughts on this?
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Old 10-29-2015, 05:26 PM
 
Location: NC Piedmont
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Probably due to the match; it is required to be done on the first N dollars or % and they aren't allowed to match in some situations and not other (to keep from discriminating against some employees and using it as a bonus). It sounds like you aren't sure yet. Why don't you confirm before being unhappy?
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Old 10-29-2015, 06:37 PM
 
Location: Florida
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This is probably correct. But you should be able to contribute on dollars paid for accrued vacation and sick time.

I think the problem is the definition of compensation. Check the wording in your plan and see if severance is considered compensation. I do not know if the IRS rules allow this.

I think the IRS require that you be an active employee and you would not be. But all 401k plans are not the same as employers can make different elections. I think you have to go to HR.

I do not think there is a limit on the amount you can contribute to a 401k out of any one paycheck (as long as you do not exceed the annual limit). See if payroll will take the money out of your pay before the termination of your active employment.
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Old 10-29-2015, 07:24 PM
 
Location: NC Piedmont
3,911 posts, read 2,876,213 times
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Quote:
Originally Posted by rjm1cc View Post
I do not think there is a limit on the amount you can contribute to a 401k out of any one paycheck (as long as you do not exceed the annual limit). See if payroll will take the money out of your pay before the termination of your active employment.
No more that 100% of pay. That is not meant to be a smart a__ response, BTW. They can choose to deduct more than your pay for insurance so that you actually owe them money if you are hourly and have too few hours in a pay period.
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Old 10-29-2015, 08:01 PM
 
Location: RVA
2,164 posts, read 1,264,598 times
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Severence is not paid compensation and is therefore not valid for a 401k contribution. I had severence 20 years ago and that was the case, and my brother just last year, same deal. However, it sure as heck is considered income for taxes and SS! Double standard for sure.
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Old 10-29-2015, 10:20 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
22,537 posts, read 39,914,033 times
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BE CAREFUL on severance payouts. Hopefully your company severance plan can fund into your retirement acct.

If it is straight pay... it will be taxed A LOT. I was taxed 40% on my 2005 adios option.

You definitely need a tax strategy and plan year-end / distributions / pay-ahead expenses to make best advantage.

I did several 179 business deductions the yr I got severance. The following yr I had ZERO earned income, so it was time to do ROTH conversions.
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Old 10-29-2015, 10:22 PM
 
Location: Albuquerque NM
1,656 posts, read 1,521,661 times
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In general, you can't use severance pay to fund the 401k because you are no longer an employee - severance is usually paid after you leave the company. You can use it to fund a traditional or Roth IRA subject to the IRA limits (e.g., income limits, contribution limits) as it is considered earned income by the IRS.

I'm federal government so our rules may be different but we are also not allowed to use our accrued annual leave payouts upon retirement to fund our TSP (401k). Of course this is also paid out after we are no longer employees so that makes sense.

But I agree that you should confirm this with HR.
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Old 10-29-2015, 10:39 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
22,537 posts, read 39,914,033 times
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Quote:
Originally Posted by ABQ2015 View Post
In general, you can't use severance pay to fund the 401k because you are no longer an employee - ... we are also not allowed to use our accrued annual leave payouts upon retirement to fund our TSP (401k). Of course this is also paid out after we are no longer employees so that makes sense.

But I agree that you should confirm this with HR.
Fortunately I got paid for my 17 weeks booked vacation. Wasn't so lucky on my accrued sick leave (for 35 yrs)... Your favorite 2016 presidential candidate took our sick leave to Monte Carlo and doubled down. I guess she lost it, cuz I never saw it again (875 hrs). She did alright on her severance. I hope she spends it all on the campaign ,or another gulfstream or yacht, as none of the 330,000 ex-employees have pledged ANYTHING to her campaign,,, (I was surprised to see that statistic as she 'saved' a lot of CPQ employees who were about to be TOAST.) but... Ruined a(nother) great company.

Remember... this severance will be your FINAL paycheck... you would think they could just keep finding your auto-deposit!
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Old 10-30-2015, 07:36 AM
 
4,431 posts, read 2,606,853 times
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Quote:
Originally Posted by Perryinva View Post
Severence is not paid compensation and is therefore not valid for a 401k contribution. However, it sure as heck is considered income for taxes and SS! Double standard for sure.
^^ This.
In order for you to contribute to a 401K, you must have EARNED income {income from pay for working}, Severance Pay is NOT EARNED income.

ALso, ALL income of any kind is taxable in most cases, so NO real double standard.

OP: why are you not happy? SO you can't get a match to your 401k... big whoop, some companies after 25 years boot you out the door without anything!!! Go open yourself a Roth IRA and put the maximum contribution into it out of your severance pay.

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Old 10-30-2015, 09:10 AM
 
Location: Albuquerque NM
1,656 posts, read 1,521,661 times
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Quote:
Originally Posted by galaxyhi View Post
^^ This.
In order for you to contribute to a 401K, you must have EARNED income {income from pay for working}, Severance Pay is NOT EARNED income.

ALso, ALL income of any kind is taxable in most cases, so NO real double standard.

OP: why are you not happy? SO you can't get a match to your 401k... big whoop, some companies after 25 years boot you out the door without anything!!! Go open yourself a Roth IRA and put the maximum contribution into it out of your severance pay.

Here is one website that states that the IRS considers severance pay to be earned income. There are many other websites that state the same thing. I just picked one at random.

Is Severance Pay Eligible for IRA Contributions? - Budgeting Money

Severance Pay

The IRS classifies severance pay -- money paid to you when you separate from your employer -- as earned income. As further evidence, severance pay is included in Box 1 of Form W-2 -- the box that includes wage and salary income -- which you receive from your employer each January. Consequently, severance can be put in an IRA.
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