Severance Pay
If one is given a one year severance pay can that pay be immediately rolled into a traditional IRA to avoid paying Federal and State income taxes on it?
If one is given a one year severance pay can that pay be immediately rolled into a traditional IRA to avoid paying Federal and State income taxes on it?
Permalink Submitted by Alan Spross on Sat, 2009-10-24 23:00
No, a rollover to an IRA must come from another IRA or retirement plan, not from cash salary. Most severance plan payments are reported on a W-2 as earned income, and therefore, you could fund a regular IRA contribution if you otherwise qualify. but those are limited to $5,000 plus another $1,000 if you have reached age 50.
If you have a qualified retirement plan with your former employer, you can do a direct rollover of the balance to an IRA after separation from service.
This is a bad time of year to get a lump severance for tax purposes since you will have almost two years of income accumulating in a single year. If there is any chance to get them to roll it out until January and then pay the rest of the lump sum in 2010, you may save on your taxes, but this depends on future employment potential.