401K Question - Contribute More?

[Pat H Senior Member Find all posts View Profile Close Pat H]

You may have read my other thread saying I'm beeing laid off as of the end of Nov. Even though I will get severance for over a year I can't contribute to the 401. I have 5 pays before I leave. I currently contribute 20% before taxes. Does it make sense to increase it to the max of 30% plus do catch up contributions for the last 5 pays?

[mas Senior Member Find all posts View Profile Close mas]

I have 5 pays before I leave. I currently contribute 20% before taxes. Does it make sense to increase it to the max of 30% plus do catch up contributions for the last 5 pays?

My wife had a similar situation when she was on serial severance a couple of years ago and couldn't contribute to her 401K. At the time she was contributing something like 25-30% of gross and it really made a difference in her taxable income.

I'm no financial expert, but my position would be, anything you can contribute now would be well worth it, as long as you can afford to make the contributions. It probably won't make that much difference in the bottom line balance of your 401k, given that you are that close to retirement and assuming that you have been contributing to it all along, but it could make a significant difference in your tax situation this year as all those contributions are sheltered and they would reduce your taxable income for the year.

It's a one time opportunity that you can't get back if you don't act now.

[tonyg Goomba & Super Moderator Find all posts View Profile Close tonyg]

Too many unknown factors to give a definite answer. Generally, the income you defer from taxes now will be taxed at a lower level in retirement unless you expect taxable income to continue at a similar level.

[Jya-Ning Silver Contributor Find all posts View Profile Close Jya-Ning]

JMHO, yes.

Your severance pay will be 50% of what it should be. The government tax. state tax, social security, medicare cut the rest.

If you can afford the money, and don't expect to touch the money in 401k, do it. Although it can be expected the tax rate probably will not be the same as now and will be on up side. Evn if you expect you may need to take the money from 401k next year, it may still worth it, since you probably will take only a portion of your current salary (the rest is covered by your final payment (severance pay) which you will pay tax this year.

Jya-Ning

[Pat H Senior Member Find all posts View Profile Close Pat H]

Jya-Ning, I am not getting my severance in a lump sum. I will get my regular pay every 2 weeks. I don't know if that makes a difference or not.

[Jya-Ning Silver Contributor Find all posts View Profile Close Jya-Ning]

It will make analysis more complex. However, unless the Tax rate becomes very high, usually, you will benefit put max 401k because the tax deduction now and tax free growth.

For severance you will pay tax on the year the money pays to you.

For 401k, you pay income tax the year you take them out.

Since you get install payment, so this year you will see the same tax rate as your last year. And unless they make a change, you will see 2010 income tax rate the same, but you will not get before tax contribution deduction in 2010.

And you probably will not touch 401k until you get all the severance pay, and run out your regular saving. So it will give you at least 1 to 2 years before that happen. Than it depends on when you want to take the pension and Social Security, you may or may not take your 401k until you reach 70 1/2 years old.

Before you reach 70 1/2 years old, you can always arrange how much you take out from 401k each year, so most likey you will benefit from put more money into your 401k now. As long as you are willing to pay attention on the tax rate and manage your cash flow to the T

Of course, if you have several Million in 401k or can see it reach that when you are 70 1/2 (which maybe very likely), then you need to find out what is your min take out requirement, and make a good assumption when that happen, what is the potential tax rate. But if that is the case, I am pretty sure enough people will tell you to convert 401k to Roth at 2010, so you would not need to pay Tax later on. If that is the case, then since you will very likely hit max tax rate in 2010 and 2011, it will not worth to put max now.

Jya-Ning

[tonyg Goomba & Super Moderator Find all posts View Profile Close tonyg]

They did away with the minimum withdrawal of traditional IRAs at age 70-1/2, so they may have done the same with the 401 k.

[Jya-Ning Silver Contributor Find all posts View Profile Close Jya-Ning]

They did away with the minimum withdrawal of traditional IRAs at age 70-1/2, so they may have done the same with the 401 k.

That is permant, or just temporary relief? My impression is temp. If that is right, 10 years from now it should be gone (Hopefully).

Jya-Ning