401(k) Max
A client has been let go from his previous employer and has recieved a sizeable severance payment. He has not made the full contribution to his 401(k) for the year, can he add a lump sum to the 401(k) before he does an IRA Rollover? He is looking to lower his tax burden for the year as he will very likely be re-employed shortly. Other suggestions would be helpful as well.
Permalink Submitted by Alan Spross on Thu, 2009-10-01 20:17
No, he cannot add to the 401k after termination, although some employers allow continued 401k participation if the severance is being paid on a roll out basis rather than a lump sum.In this case it sounds like he received a lump sum severance.
Client may be eligible for a TIRA or Roth IRA contribution, but probably cannot deduct the TIRA contribution because of his 401k participation and income limits. Receiving a lump sum severance late in the year often results in a substantial income increase for the year. He should attempt to accelerate any itemized deductions this year since his marginal tax rate may well be higher than normal.
Permalink Submitted by mk foss on Fri, 2009-10-02 00:05
A problem often arises when an individual changes jobs during a year and participates in 401k plans of the old and the new employer. The problem occurs if they go over the limit when combining the two plans. If this person takes another job before the end of 2009, the new employer could have a plan which would help his situation slightly.
Alan’s suggestion of accelerating deductions is a good one.