Minimize tax consequences

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    Minimize tax consequences

    Hi there, I am asking this for a good friend of mine, Chunky, who will be retiring in 3 months, because he has exhausted his options of what he could do to minimize his PTO (paid time off) cash out taxes.

    Background - Chunky is going to be 63 years old, his wife is 60 years old, and they have an adult son who doesn't live with them.  Chunky's wife does not work and Chunky's annual salary is about $100K.  They have a paid-off house in Massachusetts and a (vacant, so no rent income) vacation home in Florida with only a small mortgage (he plans to sell the Massachusetts home after his retirement, with about $150K capital gain and he will use that to pay off his Florida house's mortgage.)  Chunky has contributed the maximum allowed amount to his 401K, and traditional IRA in the last few years.  Due to his planned retirement in July, he will have less income for tax year 2012, as well as less contributions to his 401K and traditional IRA than previous years.  He will probably start receiving his first defined benefits pension plan check from his company in October and his annual distribution is around 70% of his pre-retirement annual salary.  Chunky and his wife are also planning to work part-time jobs in Florida, as well as attending some college courses after they are settled there. Lastly, he will have a sizable cash out on his PTO (mostly his accumulated unused vacation time), which amount to around $60K.

    Here comes the question: His company allows him to "roll over" $33K of his $60K PTO cash out to his 401K, and he could contribute about (the remaining) $3K into his traditional IRA (he has contributed about $3K into that account from January to June).  So, as he was told by his payroll manager at his company, he will have to pay taxes on the remaining balance of $24K as a bonus (Chunky did not tell me the tax %).  Since he has exhausted his 401K (normal, catch-up, and the maximum allowed amount for 'roll over') account's limit, as well as his traditional IRA, what other options he could have so that he could minimize the tax consequences of the cash out? Can he contribute to a pre-tax annunity or other type of pre-paid healthcare accounts or college expense account that would accept pre-tax dollars? (He has thought about Roth IRA or non-deductible IRA, but those contributions are after-tax dollars, not pre-tax dollars.)

    I appreciate your opinions on how many options, if any, that Chunky would have.  Thanks.

    Fay
     
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    Re: Minimize tax consequences

    In Response to Minimize tax consequences:
    Hi there, I am asking this for a good friend of mine, Chunky, who will be retiring in 3 months, because he has exhausted his options of what he could do to minimize his PTO (paid time off) cash out taxes. Background - Chunky is going to be 63 years old, his wife is 60 years old, and they have an adult son who doesn't live with them.  Chunky's wife does not work and Chunky's annual salary is about $100K.  They have a paid-off house in Massachusetts and a (vacant, so no rent income) vacation home in Florida with only a small mortgage (he plans to sell the Massachusetts home after his retirement, with about $150K capital gain and he will use that to pay off his Florida house's mortgage.)  Chunky has contributed the maximum allowed amount to his 401K, and traditional IRA in the last few years.  Due to his planned retirement in July, he will have less income for tax year 2012, as well as less contributions to his 401K and traditional IRA than previous years.  He will probably start receiving his first defined benefits pension plan check from his company in October and his annual distribution is around 70% of his pre-retirement annual salary.  Chunky and his wife are also planning to work part-time jobs in Florida, as well as attending some college courses after they are settled there. Lastly, he will have a sizable cash out on his PTO (mostly his accumulated unused vacation time), which amount to around $60K. Here comes the question: His company allows him to "roll over" $33K of his $60K PTO cash out to his 401K, and he could contribute about (the remaining) $3K into his traditional IRA (he has contributed about $3K into that account from January to June).  So, as he was told by his payroll manager at his company, he will have to pay taxes on the remaining balance of $24K as a bonus (Chunky did not tell me the tax %).  Since he has exhausted his 401K (normal, catch-up, and the maximum allowed amount for 'roll over') account's limit, as well as his traditional IRA, what other options he could have so that he could minimize the tax consequences of the cash out? Can he contribute to a pre-tax annunity or other type of pre-paid healthcare accounts or college expense account that would accept pre-tax dollars? (He has thought about Roth IRA or non-deductible IRA, but those contributions are after-tax dollars, not pre-tax dollars.) I appreciate your opinions on how many options, if any, that Chunky would have.  Thanks. Fay
    Posted by concerned-ma-citizen


    Dear concerned-ma-citizen:

    Sorry, but it sounds like he's done everything he can do to "dodge the tax bullet", except if the employer is willing to pay out his money over two years - 2012 and 2013.  he down side to that, given what is scheduled to happen to tax rates on January 1, 2013 (absent action by Congress), he could wind up in a higher tax bracket and have less net cash by "pushing off" some income to next year.  This is a case of "don't let the tax tail wag the dog".  Best advice is to take the money, pay the taxes and invest the balance.

    Hope this helps with your tax planning!

    Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal
    Katz, Nannis + Solomon, P.C.
     
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