Slott Report Mailbag: Can I Use Severance Pay as Compensation for a 401(k) Contribution?

Thursday, September 19, 2013

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag includes questions on using severance pay as compensation for 401(k) contributions, using non-cash distributions to satisfy RMDs (required minimum distributions, and rolling an after-tax 401(k) to a Roth IRA? As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Ed,

As long as an employee’s total contributions to his 401(k) in a single year do not exceed $50,000 or 100% of your compensation, does the IRS prohibit an employee from putting his severance pay into his 401(k) when he retires as an after-tax contribution?

In other words, with respect to after-tax contributions to a 401(k), does the IRS preclude the use of severance pay to make after-tax contributions to a 401(k)?

Thanks.

Scott

Answer:
Generally, severance pay is made to employees after they leave the company they work for. True severance pay or “parachute payments” are not considered compensation for purposes of making 401(k) contributions.

2.

Are non-cash RMDs permitted for inherited IRAs that are already in distribution due to the age of the deceased? The beneficiary is age 60.

Answer:
Non-cash distributions can be made to a beneficiary of an inherited IRA to satisfy the RMD for the year regardless of when the decedent died or the age of the beneficiary.

3.

Can an after-tax 401(k) be rolled over to a Roth IRA ?

Answer:
Yes. All 401(k) funds can be converted to a Roth IRA. However, the pro-rata tax rule will generally apply.We looked at that situation in this article.
 

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