Max out My 401(k) Before Severance Payments Begin?

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Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

Good evening!

My employer has been struggling financially the last two years and my position was pulled into the third round of reductions in force and position consolidations. As I have been working on several sensitive legal and financial issues for the company, my employer would like me to try to complete my work on those items over the summer in return for 4 months of severance after that, getting me my current compensation to be paid through December.

The question my wife and I have is related to whether or not we should max out my 2023 401(k) contributions over the next several months before I end my work in August and severance begins, or instead put as much as we can into our emergency savings account. My severance payments would not be eligible for deferral into my employer's 401(k) plan so I have a limited number of regular paychecks in July and August to make 401(k) contributions before I move to severance.

Here are some of the key demographics and financial numbers that may be helpful should you have time to review our personal situation and provide us with your initial thoughts and recommendations:

Ages:
Me = 58
Wife = 45

Current Biweekly Gross / Net Paychecks:
Me = $6.6k / $3.7k
Wife = $5.4k / $2.8k

Average Monthy Expenses:
YTD 2023 = $6.3k
2022 = $6.8k

Current Primary and Secondary Emergency Savings:
Primary = Money Market Funds = $48.4k
Secondary = I Bonds = $41.4k (These become available in October 2023 after the 12-month holding period)

Tertiary Emergency Savings (Original Roth IRA Contributions):
Me = $70.2k
Wife = $50.0k

YTD 2023 401(k) Contributions to Respective Employer 401(k) Plans:
Me = $6.6k
Wife = $8.9k

Current 401(k) Balances:
Me = $770.4k
Wife = $42.9k

Current HSA Balances:
Me = $13.6k

Current Earnings on Top of Original Contributions in Roth IRAs:
Me = $80.3k
Wife = $9.5k

Monthly Pension if Started Drawing in July 2023:
Me = $965 ($1,486 if I can wait to start drawing the pension in 2030 at age 65)

Current Combined Monthy Interest from Money Market Funds and I Bonds:
$350

Realistic Job Opportunites / Stability Going Forward:
Me: With my age, and the fact that corporate administrative roles like mine are being slashed across the board, the realistic prognosis for a new position is not great. Some of my very talented and skilled former workmates who were let go in Rounds 1 and 2 of the RIFs are still unemployed many months later, with in some cases over 100 applications submitted with little or no interviews.

Wife: She has 18 months of work experience now as a new graduate RN and she is working for a very stable, large non-profit healthcare system that is, however, struggling mightily to maintain required staffing levels. She continues to be offered shift incentives and annual pay increases, and this has helped in large part build up our emergency savings to where they are now.

Pro / Con Discussion:
--If I max out my 401(k) contributions over the final 4 regular biweekly paychecks (2 in July and 2 in August) I can just reach my 402(g) limit of $30k to lower our 2023 taxes and then once my severance checks start my wife can set her paychecks to net zero to max out hers to her 402(g) limit of $22.5k. By doing this we further increase our retirement savings and keep our 2023 taxable income as low as possible.

--If, alternatively, we just continue to contribute up to our respective employer's 401(k) match level then we can further increase our emergency savings in recognition of a very challenging job market for me and the fact that my age at 58 could be a concern to some prospective employers. Since I would no longer be benefit-eligible after August my net severance checks would be approximately $4.0k over 13 biweekly paychecks, for a total of $52k to help cover monthly expenses and build up more savings.

--If, in the longer term, there is no market for my skills as there has been in the past, and we had to get by on my wife's paycheck, then we would have to draw from our emergency savings each month. Here is how we are estimating that the drawdown would be starting in January 2024, after my severance checks end in December 2023:

Wife's Net Biweekly Paycheck = $2.8k
Annual Projected Take-Home Pay for my Wife = $72.8k ($2.8k * 26 biweekly paychecks)
Current Projected Average Monthly Expenses in 2024 = $6.6k
Current Projected Annual Expenses in 2024 = $79.2k
Current Projected 2024 Gap Between Wife's Annual Paycheck Earnings and Annual Expenses = $6.4k ($79.2k - $72.8k)

Our Initial Thoughts:
--My wife and I are leaning towards focusing on getting as much money into emergency savings between now and December 2023 given the state of the job market for me, a potential upcoming recession making the job market even more challenging, and that there could always be another financial X variable for us. But if we do that then our income taxes this year will take a big jump up by not maximizing our respective 401(k) pre-tax contributions.

--The key question we are both struggling with: Do we have enough emergency savings in hand across our various accounts, all things considered, where we can still max out my 401(k), and potentially also my wife's 401(k), for 2023, and feel secure that we have a financial plan in place until I reach age 59.5 (now 18 months away) if the market demand for my skills is as poor as we suspect? At age 59.5 the 10% early withdrawal penalty goes away on my 401(k)s and all my Roth IRA earnings would no longer be taxable.

Thank you in advance for taking the time to review our personal financial situation and for sharing your thoughts on how to best approach our 401(k) contributions this year, and any other ideas you may have for us!

Regards,

Joe
backpacker61
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Joined: Wed May 20, 2020 6:36 am

Re: Max out My 401(k) Before Severance Payments Begin?

Post by backpacker61 »

I'm sorry that you're in this situation. I was let go in 2009 during the global financial crisis, and I understand how traumatic it can be. At that time, it felt as if "the world as we know it" was coming to an end. I did eventually secure another position which has worked out well, although it took a while.

One of my lingering regrets is that I didn't contribute the 401(K) limit to my employer-sponsored retirement plan for 2009. I did get the max contributed into my new employer's retirement plan for 2010 despite only working 5 months of that year (but that involved a whole lot of rice, beans and macaroni!).

In my opinion, you will find another job, though it may take some time. I think you all are in fine shape to weather the meantime.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
nedjames
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Joined: Wed Sep 21, 2022 3:51 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by nedjames »

Yes Yes Yes. I was n a similar situation in 2017. It may be one of very few opportunities for you to maximize going forward. Maximizing Roth is even better,
queenofthemadhouse
Posts: 307
Joined: Fri Jun 04, 2021 5:26 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by queenofthemadhouse »

I am also sorry you are in this situation, but I think you are in great shape to wait out the job market and max out the 401ks.

You have about a $1K monthly deficit on a two paycheck month (less on an annual basis), and you have $90K between the money market and the IBonds. That would bridge you all the way to 65, nearly to SSNRA if you decided to nope out of the workforce entirely. To say nothing of Roth money or the pension.

Understanding there's $37K of 401k contributions remaining for 2023, there's also a sizeable monthly margin $13K ($6K or so a month while you have two paychecks). That will make those contributions and still leave a little space to add a little more to that $90K.

I also wonder if you could adjust her W4 for 2024, if you were not working, and cut down that deficit.
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Max out My 401(k) Before Severance Payments Begin?

Post by MrJedi »

You should find out if your 401k plan allows for partial distributions after you separate. The IRS has an exception to the 401k early withdrawal penalty if you separate from the employer at age 55 or later (commonly referred to as rule of 55). The trick is not all plans allow for partial distributions, in that case it's not useful if you have to take the entire balance at once due to taxes. If you can do partial distributions, then you will be able to effectively take money out after separation as needed. In that case you may as well put it in and take it out later if you do need it.
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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by Watty »

careerdata wrote: Sat May 27, 2023 6:11 pm The question my wife and I have is related to whether or not we should max out my 2023 401(k) contributions over the next several months before I end my work in August and severance begins, or instead put as much as we can into our emergency savings account.
......
Ages:
Me = 58
You would want to double check on it but I am pretty sure that if you maxed out your 401k and then later needed the money then you can usually just withdraw it from the 401k since you will have been 55 in the year you left that job.

Within the 401k you can invest that money in something conservative since you might need it soon.

The only concern that I can see would be if you are needing to manage your income to get an affordable care act healthcare subsidy then you might not want the taxable income to be in 2024 if you need to withdraw money from the 401k then.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

backpacker61 wrote: Sat May 27, 2023 6:45 pm I'm sorry that you're in this situation. I was let go in 2009 during the global financial crisis, and I understand how traumatic it can be. At that time, it felt as if "the world as we know it" was coming to an end. I did eventually secure another position which has worked out well, although it took a while.

One of my lingering regrets is that I didn't contribute the 401(K) limit to my employer-sponsored retirement plan for 2009. I did get the max contributed into my new employer's retirement plan for 2010 despite only working 5 months of that year (but that involved a whole lot of rice, beans and macaroni!).

In my opinion, you will find another job, though it may take some time. I think you all are in fine shape to weather the meantime.
Thank you for sharing your experience! I am definitely struggling with this! My wife encouraged me to post our situation here as she has also felt the feedback we have received in the past on BH was extremely helpful. The emotional side of my brain says to "batten down the hatches" and build up the emergency account but my analytical side says to instead think longer term and reduce taxes whenever we can. My wife is also torn on what to do.

Regards,

Joe
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

nedjames wrote: Sat May 27, 2023 6:59 pm Yes Yes Yes. I was n a similar situation in 2017. It may be one of very few opportunities for you to maximize going forward. Maximizing Roth is even better,
Thank you for sharing! My wife for most of our marriage was a stay-at-home spouse in order to care for our autistic daughter, and as our daughter has improved over time and become more independent, it gave us the courage to have my wife return to school to get her BSN. So last year was the first year of our marriage where we were both able to reach our respective 402(g) contribution limits. We were planning to do the same this year after first building up our emergency savings to $100k. That was "Plan A" for 2023 so we are trying to determine if we can still accomplish "Plan A" after getting the bad news a couple of days ago regarding my position.

With regard to your Roth comment, are you suggesting we a) max out the 401(k)s and b) use some of our existing $90k of emergency savings to make Roth IRA contributions for the tax year 2023?

Regards,

Joe
pizzy
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Joined: Tue Jun 02, 2020 6:59 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by pizzy »

You should definitely try to max the 401k and keep taxes minimized.

The annual deficit is small enough that your EF can handle years (you won’t need it too).
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

queenofthemadhouse wrote: Sat May 27, 2023 7:06 pm I am also sorry you are in this situation, but I think you are in great shape to wait out the job market and max out the 401ks.

You have about a $1K monthly deficit on a two paycheck month (less on an annual basis), and you have $90K between the money market and the IBonds. That would bridge you all the way to 65, nearly to SSNRA if you decided to nope out of the workforce entirely. To say nothing of Roth money or the pension.

Understanding there's $37K of 401k contributions remaining for 2023, there's also a sizeable monthly margin $13K ($6K or so a month while you have two paychecks). That will make those contributions and still leave a little space to add a little more to that $90K.

I also wonder if you could adjust her W4 for 2024, if you were not working, and cut down that deficit.
Thank you! Although it is very mentally taxing and long hours, I do love what I do, so I am hoping I can find another opportunity. Because of my wife's crazy 12-hour shifts, alternating between days and nights, it has been a logistics challenge with our two kids. My position right now is 100% remote but I would have been transitioning on-site soon if I was to remain there, so we were going to have to face a challenge either way. Part of my transition agreement would allow me to continue to work remotely through August while I complete the key ongoing projects and train others on the analytical processes that I created for the company. So that was the only positive my wife took from the announcement, as she was worried about how we going to juggle schedules this summer with me not at home to get the kids around to their activities when she was either at work or resting during the day after a night shift.

Because my wife only started working full-time as a nurse in late 2021, I did not have our 2022 W-4 withholdings on track to reflect our higher income, but I was able to get some very helpful tips from the BH community on how to get caught up late in 2022 from our paychecks so that we could avoid an underpayment penalty. Out of that posting I made on BH was a suggestion for both of us to set our W-4s for 2023 as single with no exemptions and add a small additional withholding on both federal and state, and then mid-2023 use the IRS withholding tool to see if we were on track, and adjust as needed for the last half of the year. So my plan is to do just that after we get through our June paychecks. If I am not working yet to start 2024 we can use the IRS to readjust again and that might further reduce the gap between earnings and expenses, as you are suggesting.

I have a three-paycheck month in June so if our monthly expenses come in on target then I think we can add another $9k to the $90k of emergency savings before we would have to start the "net pay of zero" setting on my two July and two August biweekly paychecks in order to try to get to the $30k limit on my 401(k) before ending my assignment.

I will have to check our PTO policies but I think they would also pay out my 3 weeks of unused PTO after my assignment ends, so that would help build up the emergency savings amount a little more. It looks like about half the three weeks in total are carried over hours from unused PTO last year, so maybe that part is not paid out at termination but what is accrued during the current plan year is. I will try to confirm how that works. At this point, every penny counts!

Thank you again for taking the time to review our personal situation and provide helpful suggestions about to approach things! My wife is still at work at the hospital from the weekend day shift she is on but she just texted me a couple of minutes ago that she was just about ready to finish her charting, clock out, and head home. She will love to be able to review all the helpful responses like yours once she has gotten home, had some food, and had a little rest!

Regards,

Joe
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

MrJedi wrote: Sat May 27, 2023 7:09 pm You should find out if your 401k plan allows for partial distributions after you separate. The IRS has an exception to the 401k early withdrawal penalty if you separate from the employer at age 55 or later (commonly referred to as rule of 55). The trick is not all plans allow for partial distributions, in that case it's not useful if you have to take the entire balance at once due to taxes. If you can do partial distributions, then you will be able to effectively take money out after separation as needed. In that case you may as well put it in and take it out later if you do need it.
Thank you for this suggestion! I am not sure this provision is in place but I will confirm. If it is, then I can see that it would provide us with more flexibility with distributions now and in the future, in case we decide to max out my 401(k) contributions for the plan year 2023 before leaving.

Regards,

Joe
FunnelCakeBob
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Joined: Fri Jul 20, 2018 5:44 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by FunnelCakeBob »

I'm sorry about your current situation, Joe. If you keep a steady head and listen to your heart as well as work as a team with your wife, you and your family will get through this. I lost my job during the Great Recession and that was one of the best things to have happened to me. I was out of a soul-sucking job with lousy management that did not fit me, or paid me very well for my labor and troubles. It took a while to find a new and higher-paying job in a different industry but I now know and appreciate my own capabilities and resilience. If you are offered outplacement services that help you assess your professional skills as part of your severance, don't pass on it.

The big item that jumped out was that your and your wife's combined monthly net income ($3.7k + $2.8k) barely exceeds your monthly expenses ($6.3k). Will your monthly expenses be manageable or decrease once your family is on 1 income? That would impact my calculation if I were in your shoes.

Otherwise, my instinct would be to maximize the 401k contribution. Your primary and secondary emergency funds ($48.4k + $41.4) seem enough should you need to tap into them. Definitely at least get your 401k match if there's one.

Also look into the 55 yo Rule as some posters suggest. If it's offered by the plan, you may not need it but it'd be nice to know that it's there. Your 401k summary plan description should detail if that's available or not. The SPD is usually on the 401k website or through your company's HR if you can't find it.

Also be sure to apply for unemployment benefits. It wouldn't be much but it's an addition. I'm guessing you're eligible as soon as you're let go after the summer although each state's unemployment works differently and could be impacted whether the severance comes in one lump sum or stretched out. Be sure to look into this in the next few weeks. Best wishes!
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

FunnelCakeBob wrote: Sat May 27, 2023 10:04 pm
The big item that jumped out was that your and your wife's combined monthly net income ($3.7k + $2.8k) barely exceeds your monthly expenses ($6.3k). Will your monthly expenses be manageable or decrease once your family is on 1 income? That would impact my calculation if I were in your shoes.
Thank you for sharing your own personal experience and providing very helpful suggestions and encouragement!

To clarify on our current paychecks, the $2.8k for my wife is her current average net biweekly paycheck as a nurse, so if I annualize that amount and then divide by 12 for a monthly estimate it comes out to $6.0k [($2.8k * 26)/12] if I round down to the nearest thousand dollar increment. Our projected 2023 average monthly expenses are tracking at $6.4k, so the current gap between earnings and expenses for 2024 is around $400. Our average monthly expenses in 2022 were higher than how 2023 is tracking in large part because we absorbed a three-week trip by my wife in 2022 to visit the Philippines in order to see her brother and his family, as it had been five years since her previous visit.

My wife's annual pay increase will be effective in July 2023 but it appears most of that will be eaten up by the extra cost of adding me to her employer's medical insurance starting in September 2023. I am already on her dental and vision plan along with our two kids. So I am leaving my wife's current net paycheck amount at $2.8k when projecting out the rest of 2023 and 2024 if we are with just one paycheck for all of 2024.

I have two former 401(k) plans in addition to the 401(k) plan with my current employer and I am not seeing in those plans or my current plan a Rule of 55 distribution option but I am going to follow up with the SPDs and then also call the respective service centers to confirm what my options are. I am seeing, however, what appears to be partial withdrawal distribution options for terminated employees on the two largest former 401(k) plans that I have. I am going to see if I can do a test partial distribution on the respective websites without actually submitting the request to better understand how the mechanics would work if needed.

I have never applied for unemployment before so there will be some learning curve there for me on that. I will definitely do the research in case I have not found a new opportunity by the end of the summer. Every penny counts!

Thank you again!

Joe
sailaway
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Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

careerdata wrote: Sun May 28, 2023 9:38 am
FunnelCakeBob wrote: Sat May 27, 2023 10:04 pm
The big item that jumped out was that your and your wife's combined monthly net income ($3.7k + $2.8k) barely exceeds your monthly expenses ($6.3k). Will your monthly expenses be manageable or decrease once your family is on 1 income? That would impact my calculation if I were in your shoes.
Thank you for sharing your own personal experience and providing very helpful suggestions and encouragement!

To clarify on our current paychecks, the $2.8k for my wife is her current average net biweekly paycheck as a nurse, so if I annualize that amount and then divide by 12 for a monthly estimate it comes out to $6.0k [($2.8k * 26)/12] if I round down to the nearest thousand dollar increment. Our projected 2023 average monthly expenses are tracking at $6.4k, so the current gap between earnings and expenses for 2024 is around $400. Our average monthly expenses in 2022 were higher than how 2023 is tracking in large part because we absorbed a three-week trip by my wife in 2022 to visit the Philippines in order to see her brother and his family, as it had been five years since her previous visit.

My wife's annual pay increase will be effective in July 2023 but it appears most of that will be eaten up by the extra cost of adding me to her employer's medical insurance starting in September 2023. I am already on her dental and vision plan along with our two kids. So I am leaving my wife's current net paycheck amount at $2.8k when projecting out the rest of 2023 and 2024 if we are with just one paycheck for all of 2024.

I have two former 401(k) plans in addition to the 401(k) plan with my current employer and I am not seeing in those plans or my current plan a Rule of 55 distribution option but I am going to follow up with the SPDs and then also call the respective service centers to confirm what my options are. I am seeing, however, what appears to be partial withdrawal distribution options for terminated employees on the two largest former 401(k) plans that I have. I am going to see if I can do a test partial distribution on the respective websites without actually submitting the request to better understand how the mechanics would work if needed.

I have never applied for unemployment before so there will be some learning curve there for me on that. I will definitely do the research in case I have not found a new opportunity by the end of the summer. Every penny counts!

Thank you again!

Joe
The rule of 55 only applies to the employer you leave after turning 55. You would only be able to use previous plans for that if you first rolled them into your current employer's plan.

You are not looking for a rule of 55 in the plan, just whether or not you can take partial distributions before 59.5. If they require a lump sum, the rule of 55 still applies, but if it is a large balance, your tax bill will probably make that a less than ideal option.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

pizzy wrote: Sat May 27, 2023 7:45 pm You should definitely try to max the 401k and keep taxes minimized.

The annual deficit is small enough that your EF can handle years (you won’t need it too).
Thank you for reviewing our personal situation and providing your recommendation on how to proceed! So far all of the responses have been like yours in that, all things considered, trying to max out our 401(k)s this year is the best approach to take.

No one can predict what the next 8 to 10 years will be like in the market, but if we could let most of the funds we have in the 401(k) and Roth accounts continue to percolate during that time period to get me to age 67, or even better to age 70, given the approximate 13-year age gap between my wife and I, then the survivor Social Security benefit for her would be much higher than if I started drawing Social Security at age 62.

If I can find work and continue to add to what we have saved already, then even better in the long-term for making sure she is protected after I pass.

Regards,

Joe
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

sailaway wrote: Sun May 28, 2023 9:45 am
The rule of 55 only applies to the employer you leave after turning 55. You would only be able to use previous plans for that if you first rolled them into your current employer's plan.

You are not looking for a rule of 55 in the plan, just whether or not you can take partial distributions before 59.5. If they require a lump sum, the rule of 55 still applies, but if it is a large balance, your tax bill will probably make that a less than ideal option.
Thank you for the clarification!

Here are the three 401(k) plans I have and the results from each per another check on the recordkeeper websites this morning:

401(k) Plan / Recordkeeper / Current 401(k) Assets / Plan Allows Partial Distributions Prior to Age 59.5 (Yes / No)

Current Employer / Vanguard / $44.0k / No
Former Employer A / Vanguard / $396.4k / Yes
Former Employer B / Fidelity / $330.0k / Yes

Without ultimately submitting the requests, I did two test partial distributions and it looked like both Former Employer A and Former Employer B would have allowed me to submit requests for $1,000 each if I had completed all the steps. There was no reference to age on the distribution requests and since I am not yet age 59.5 it seems like this is available to me right now. To be 100% sure, however, I will contact the respective service centers for each former employer plan and also confirm that my current employer's plan would not offer me the same partial distribution option once I am in a terminated status.

The Fidelity website for Former Employer B also had an automatic withdrawal option where it looks like you could set a fixed dollar amount or a fixed percentage of assets on various payment frequencies. I did not see an automatic withdrawal option on the Vanguard website for Former Employer A.

So, if I am understanding what I just saw at first blush this morning on the recordkeeper websites, we would be able to access two of my three 401(k) plans for partial withdrawal amounts if absolutely needed, but if we can wait until I reach age 59.5 that would be even better as the 10% early withdrawal penalty would no longer apply.

Ideally, I will find work once again so that we can keep adding to the plans, but if we have the option to tap two of 401(k) plans in a worst-case financial scenario at some point in the future, then that will give us more peace of mind that maxing out the 401(k)s this year is the right thing to do in both the near-term and the long-term.

Thank you again for clarifying what I need to be looking for on the recordkeeper websites!

Regards,

Joe
JeanneForever
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Joined: Mon May 31, 2021 8:42 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by JeanneForever »

Seems like any job would help and it doesn't have to be near your former earnings if your annual deficit is so small. Something at a school, church, non-profit that you could do part time, maybe? Or help a small business very part time.
sailaway
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Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

While those employers will allow the partial distributions, the IRS rule of 55 will not apply, as you left those employers before the year in which you turned 55 (unless I am wrong and you only recently moved to your current employer). This means that while you can take small distributions, you will owe the 10% early withdrawal penalty unless you invoke a different option.

You might consider SEPP, but be aware that this will be at least a five year plan.
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Wiggums
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Re: Max out My 401(k) Before Severance Payments Begin?

Post by Wiggums »

Sorry for your job loss. As long as you can do a partial 401k distribution, I would put the money in the 401k. There’s really no downside to adding to your emergency fund. Also, you can start sending out resumes now. Worse that happens is you get a job offer, right?
"I started with nothing and I still have most of it left."
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

Watty wrote: Sat May 27, 2023 7:10 pm
careerdata wrote: Sat May 27, 2023 6:11 pm The question my wife and I have is related to whether or not we should max out my 2023 401(k) contributions over the next several months before I end my work in August and severance begins, or instead put as much as we can into our emergency savings account.
......
Ages:
Me = 58
You would want to double check on it but I am pretty sure that if you maxed out your 401k and then later needed the money then you can usually just withdraw it from the 401k since you will have been 55 in the year you left that job.

Within the 401k you can invest that money in something conservative since you might need it soon.

The only concern that I can see would be if you are needing to manage your income to get an affordable care act healthcare subsidy then you might not want the taxable income to be in 2024 if you need to withdraw money from the 401k then.
Thank you so much for your reply!

Although my current employer's 401(k) does not appear to offer a partial withdrawal prior to age 59.5, the two plans from former employers, where most of my 401(k) assets are, do appear to offer partial withdrawals prior to age 59.5. Given that the 10% early withdrawal would still apply, however, our hope is to be able to get me to at least age 59.5 before even thinking of taking a withdrawal. I will be 59.5 in about 18 months from now.

The plan is for my wife to add me to her employer's medical plan in September of this year after I drop off my current employer's medical plan on 8/31/23. Is there another approach that we should be considering regarding medical coverage for me related to the ACA?

Regards,

Joe
sailaway
Posts: 8187
Joined: Fri May 12, 2017 1:11 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

careerdata wrote: Sun May 28, 2023 11:20 am
Watty wrote: Sat May 27, 2023 7:10 pm
careerdata wrote: Sat May 27, 2023 6:11 pm The question my wife and I have is related to whether or not we should max out my 2023 401(k) contributions over the next several months before I end my work in August and severance begins, or instead put as much as we can into our emergency savings account.
......
Ages:
Me = 58
You would want to double check on it but I am pretty sure that if you maxed out your 401k and then later needed the money then you can usually just withdraw it from the 401k since you will have been 55 in the year you left that job.

Within the 401k you can invest that money in something conservative since you might need it soon.

The only concern that I can see would be if you are needing to manage your income to get an affordable care act healthcare subsidy then you might not want the taxable income to be in 2024 if you need to withdraw money from the 401k then.
Thank you so much for your reply!

Although my current employer's 401(k) does not appear to offer a partial withdrawal prior to age 59.5, the two plans from former employers, where most of my 401(k) assets are, do appear to offer partial withdrawals prior to age 59.5. Given that the 10% early withdrawal would still apply, however, our hope is to be able to get me to at least age 59.5 before even thinking of taking a withdrawal. I will be 59.5 in about 18 months from now.

The plan is for my wife to add me to her employer's medical plan in September of this year after I drop off my current employer's medical plan on 8/31/23. Is there another approach that we should be considering regarding medical coverage for me related to the ACA?

Regards,

Joe
Unless I am mistaken, it is the year you turn 59.5. if so, it sounds like you could start withdrawing from those old plans as soon as next January without penalty.

ETA: I WAS MISTAKEN
Last edited by sailaway on Sun May 28, 2023 11:37 am, edited 1 time in total.
queenofthemadhouse
Posts: 307
Joined: Fri Jun 04, 2021 5:26 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by queenofthemadhouse »

It's 59 1/2, not the year of.

The 'year of' is for the Rule of 55.

https://www.irs.gov/retirement-plans/pl ... tributions
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

queenofthemadhouse wrote: Sun May 28, 2023 11:34 am It's 59 1/2, not the year of.

The 'year of' is for the Rule of 55.

https://www.irs.gov/retirement-plans/pl ... tributions
Thank you!

I turn 58 in a couple of weeks, on June 21st, so the absolute soonest I would want to take a withdrawal from either of two former 401(k) plans and be able to avoid the 10% early distribution penalty would be to request the distribution on December 22, 2024 (or December 23 as the 22nd would be a Sunday)? This would be if we want to spread the withdrawals out over several tax years (2024 and 2025) if there is some large expense in the next 18 months that needs to be tackled that is outside of our current budget. If there are no unexpected large expenses that can't be covered by our emergency savings, then we can just let these amounts continue to accumulate in the two 401(k) plans.

Regards,

Joe
Sweet Betsy
Posts: 71
Joined: Wed May 01, 2013 9:42 am

Re: Max out My 401(k) Before Severance Payments Begin?

Post by Sweet Betsy »

If I were you, I'd max out my 401k during my last couple of months at my employer and continue with the plan to max out your wife's 401k throughout the year. With your severance, you will not have a drop in income this year. I suspect that you may not even need to tap into your emergency fund next year to make up for a monthly shortfall. With you home full-time, your wife may be able to take on additional shifts and increase her income and cover your monthly expenses in full. You are very close to being able to tap into your 401K penalty free (assuming the rule of 55 doesn't pertain to your current 401K plan) and should easily be able to cover any necessary expenses with your emergency fund throughout 2024.

I wish you the best and hope you find another job soon, but if you do not, it will be okay.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

Sweet Betsy wrote: Sun May 28, 2023 1:54 pm If I were you, I'd max out my 401k during my last couple of months at my employer and continue with the plan to max out your wife's 401k throughout the year. With your severance, you will not have a drop in income this year. I suspect that you may not even need to tap into your emergency fund next year to make up for a monthly shortfall. With you home full-time, your wife may be able to take on additional shifts and increase her income and cover your monthly expenses in full. You are very close to being able to tap into your 401K penalty free (assuming the rule of 55 doesn't pertain to your current 401K plan) and should easily be able to cover any necessary expenses with your emergency fund throughout 2024.

I wish you the best and hope you find another job soon, but if you do not, it will be okay.
Thank you for reviewing the original post and the responses so far. It is 100% so far on the responses with regard to the best plan of attack for us, which is to lock in the 2023 tax savings by maxing out our 401(k)s.

My wife is on the three-day holiday weekend shift (Sat-Sun-Mon) so I won't be able to go through all the very helpful responses with her until sometime later this week. I think she will feel more confident about what we should do with our 401(k)s after having a chance to digest it all.

Here are some other options we discussed on Friday to increase household income while we also take a fresh look at our expenditures to see if there are any areas we can tighten up a bit:

--My wife's employer allows each employee to sell up to 100 hours each year of unused PTO each year. With just a short trip in August for a family reunion slated for this year's travel budget, we could sell 100 hours of PTO in December 2023, which would then be paid out in her first paycheck of February 2024. At her current hourly rate, which should increase between 2 and 3% in July based on the increases for the prior two years, that would come out to just under $2,900 before taxes.

--My wife's employer has a weekend day shift incentive that we are currently testing out to see if we can manage the logistics end of it at home with the kids and my current work. After we received the news about my position this past Thursday, we discussed the idea of her putting in a request to her supervisor to be given consideration for the night version of the weekend shift incentive, where she would regularly work Fri-Sat-Sun nights with one other night shift worked during the rest of the week. The overtime part of the calculation of the incentive is something I am still trying to replicate on my own, and we have some questions sent to her employer's Payroll Department on where we can locate the weekly breakdown of the hours tied to her differentials (evening, night and weekend), but on my first rough attempt at that, it appears it would increase her net biweekly pay from the current $2.8k to $3.1k.

Thank you also for the positive thoughts regarding my finding another position soon, which if that would happen makes all of this MUCH less stressful financially!

Regards,

Joe
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

sailaway wrote: Sun May 28, 2023 11:09 am While those employers will allow the partial distributions, the IRS rule of 55 will not apply, as you left those employers before the year in which you turned 55 (unless I am wrong and you only recently moved to your current employer). This means that while you can take small distributions, you will owe the 10% early withdrawal penalty unless you invoke a different option.

You might consider SEPP, but be aware that this will be at least a five year plan.
I will have been with my current employer for two years by the end of the summer, so it does appear that the Rule of 55 will not be an option for us. If we do need to take a distribution prior to reaching age 59.5, then we would have to factor in the 10% early distribution penalty on top of the federal and state taxes.

I will see what I can find on the SEPP you referenced.

Thank you!

Joe
sailaway
Posts: 8187
Joined: Fri May 12, 2017 1:11 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

careerdata wrote: Mon May 29, 2023 10:41 am
sailaway wrote: Sun May 28, 2023 11:09 am While those employers will allow the partial distributions, the IRS rule of 55 will not apply, as you left those employers before the year in which you turned 55 (unless I am wrong and you only recently moved to your current employer). This means that while you can take small distributions, you will owe the 10% early withdrawal penalty unless you invoke a different option.

You might consider SEPP, but be aware that this will be at least a five year plan.
I will have been with my current employer for two years by the end of the summer, so it does appear that the Rule of 55 will not be an option for us. If we do need to take a distribution prior to reaching age 59.5, then we would have to factor in the 10% early distribution penalty on top of the federal and state taxes.

I will see what I can find on the SEPP you referenced.

Thank you!

Joe
So you had already turned 55 when you left your previous employer, and that plan does allow for partial distributions?

Plus, taking the lump sum from your current employer would not be much more than you plan to take out next year anyway, and therefore not be a significant burden?
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

JeanneForever wrote: Sun May 28, 2023 11:07 am Seems like any job would help and it doesn't have to be near your former earnings if your annual deficit is so small. Something at a school, church, non-profit that you could do part time, maybe? Or help a small business very part time.
Thank you for your reply! My wife and I have discussed this option but, for now, she wants to see if I can find something equivalent to my current role and compensation. That will be a challenge based on what has been the job search experience of some of my very talented and hard-working peers, who had their positions eliminated last year in Round 1 of the RIFs. The position would have to be remote, or with a lot of work-from-home flexibility if local, for me to be able to coordinate with my wife to get our autistic daughter to-and-from school and other activities, and our son to-and-from college. Logistics! :happy

My wife was born and raised in the Philippines and her trip there earlier this year reminded her of how important it is to her to be able to spend time with her brother, visit her childhood and college friends, and eat all the foods she grew up with. She would like to be able to split our time in retirement between the Philippines and the U.S. To realize that vision, however, would require me to likely work until at least 62 and save-save-save, but that may not be possible if corporate America has other ideas. I will do my very best to see if we can, working together, realize her 50/50 Philippines/U.S. vision, as it was me who asked her to leave all that she knew and loved to join me here in the U.S. almost 20 years ago now.

Regards,

Joe
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by HomeStretch »

Sorry to hear about your job loss. Do whatever makes you feel most secure. But, consider maxing out your 401k contribution rather than increasing your emergency fund. You have several options per below if you need cash to fund expenses after your severance runs out at the end of 2023. Keep in mind that as of 1/1/24 you will only be a year away from age 59-1/2.

Options for cash:
(1) cash from a new job, consulting for your current employer/others or unemployment compensation.
(2) withdraw funds from another Taxable account or a Roth IRA, if any.
(3) penalty-free distribution from your 401k under the ‘Rule of 55’. If your Plan does not allow partial distributions, you can withdraw what you need for a year of expenses (until you turn 59-1/2) in conjunction with a rollover of the remaining 401k funds to an IRA.
(4) penalty-free IRA distributions under SEPP 72(t).

Best of luck.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

sailaway wrote: Mon May 29, 2023 10:51 am
So you had already turned 55 when you left your previous employer, and that plan does allow for partial distributions?
Correct!
sailaway wrote: Mon May 29, 2023 10:51 am
Plus, taking the lump sum from your current employer would not be much more than you plan to take out next year anyway, and therefore not be a significant burden?
Actually, I am hoping we do not have to tap any of the 401(k)s and just draw down from the current $48.4k we have in our money market funds. If we can hold the line with no unexpected large expenses in June, with it being a three-paycheck month for me, then we may be able to add another $9.0k to the existing $48.4k.

But...if life has taught me anything, it has taught me that you really need to have a Plan B, and maybe even a Plan C, mapped out, in case Plan A fails. My wife has chided me that my "Plan A's" NEVER seem to materialize, and it does seem that way to me too, so that is why I am trying to map out as many different options as possible. With many BH community members like yourself willing to help, I have always been able to piece together for my wife a couple of different options to discuss. My kids say I REALLY overuse this phrase with them, almost to the point of being a pain, but today it rings more true to me than ever:

"Failing to plan is planning to fail."

Thank you again for taking the time to review my original posting and the follow-ups to that post!

Regards,

Joe
sailaway
Posts: 8187
Joined: Fri May 12, 2017 1:11 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

careerdata wrote: Mon May 29, 2023 11:42 am
sailaway wrote: Mon May 29, 2023 10:51 am
So you had already turned 55 when you left your previous employer, and that plan does allow for partial distributions?
Correct!
sailaway wrote: Mon May 29, 2023 10:51 am
Plus, taking the lump sum from your current employer would not be much more than you plan to take out next year anyway, and therefore not be a significant burden?
Actually, I am hoping we do not have to tap any of the 401(k)s and just draw down from the current $48.4k we have in our money market funds. If we can hold the line with no unexpected large expenses in June, with it being a three-paycheck month for me, then we may be able to add another $9.0k to the existing $48.4k.

But...if life has taught me anything, it has taught me that you really need to have a Plan B, and maybe even a Plan C, mapped out, in case Plan A fails. My wife has chided me that my "Plan A's" NEVER seem to materialize, and it does seem that way to me too, so that is why I am trying to map out as many different options as possible. With many BH community members like yourself willing to help, I have always been able to piece together for my wife a couple of different options to discuss. My kids say I REALLY overuse this phrase with them, almost to the point of being a pain, but today it rings more true to me than ever:

"Failing to plan is planning to fail."

Thank you again for taking the time to review my original posting and the follow-ups to that post!

Regards,

Joe
Looks to me like your previous employer plan is a solid plan B.
Jack FFR1846
Posts: 18461
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Max out My 401(k) Before Severance Payments Begin?

Post by Jack FFR1846 »

I'll start by saying that I am Mr. Financially Conservative. Possibly the most on Bogleheads, holding 57 times spending in liquid assets and retiring in one month and holding off till 70 at which point SS for DW and me will cover 100% of our expenses. We're hoarding cash in prep of retirement with huge premiums for ACA and Medicare. We'll spend just under $70k a year in retirement and have around $250k in cash. So you might think I'd say to put it all in an emergency fund. And I would .... except when I saw that your wife is a nurse. So is mine. And although with my support (ok, pushing her), she ended working 6 months ago and she gets offers almost daily from travel nurses, Mass General, BI, small hospitals, VNA. Nurses are still in short supply and will continue to be because they are still treated like crap by employers. So your wife will not be without a job and her income can nearly support all of your current spending. In addition, in addition to the severence, you could get a throw away job at Home Depot or the like to bring in some extra money and you know what? You wouldn't even need to find another job like you were doing.
Bogle: Smart Beta is stupid
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

HomeStretch wrote: Mon May 29, 2023 11:32 am Sorry to hear about your job loss. Do whatever makes you feel most secure. But, consider maxing out your 401k contribution rather than increasing your emergency fund. You have several options per below if you need cash to fund expenses after your severance runs out at the end of 2023. Keep in mind that as of 1/1/24 you will only be a year away from age 59-1/2.
Thank you for replying and providing recommendations! So far it appears that those that have responded feel, like you, that a) maxing out our 401(k)s for 2023 is the best approach and b) we may have enough emergency savings to cover our average annual expenses for at least the next several years. I will go hard looking for a new opportunity but, more immediately, I think my wife will feel better about our financial situation once she has a chance in the next couple of days to review this thread and the consensus that is emerging.
HomeStretch wrote: Mon May 29, 2023 11:32 am
Options for cash:
(1) cash from a new job, consulting for your current employer/others or unemployment compensation.
(2) withdraw funds from another Taxable account or a Roth IRA, if any.
(3) penalty-free distribution from your 401k under the ‘Rule of 55’. If your Plan does not allow partial distributions, you can withdraw what you need for a year of expenses (until you turn 59-1/2) in conjunction with a rollover of the remaining 401k funds to an IRA.
(4) penalty-free IRA distributions under SEPP 72(t).

Best of luck.
The original "Plan A" for 2023 was, in the following order, first build up our emergency savings to $100k, then max out our respective 401(k)s without losing any company match if possible, then make full contributions to our Roth IRAs, and finally, if anything was left after all that, start adding to our after-tax brokerage account (currently with just under $1k in it).

More recently we had discussed maybe making another I Bond investment by the end of October, with the fixed component being 0.9%, but I'm not sure that makes sense anymore with the news related to my position. Our initial I Bond investments of $40k made in 2022 will reach their 12-month holding period in September and October of this year and are part of our secondary emergency fund. I was hoping to continue to build that out given that 0.9% fixed component might be the last time we see that level for a while if inflation continues to slowly trend down.

I have not applied for unemployment before but have that on my list to better understand how that works if I do not have a new position lined up by the end of the summer.

I think it was determined from the other postings that the "Rule of 55" is not an option for me, given that my current employer's 401(k) plan does not offer partial distributions, and I was 55 when I left my prior employer. Please correct me if I am not interpreting that correctly!

Regarding the Roth IRAs, we do have a total of $120.2k in original contributions that could be tapped with penalty or tax as a tertiary emergency fund.

I am not up-to-speed on SEPP 72(t), but it was referenced by another community member as well, so I have added it to my list to research more prior to discussing it with my wife.

Thanks so much!

Joe
WhiteMaxima
Posts: 3323
Joined: Thu May 19, 2016 5:04 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by WhiteMaxima »

You will be in lower tax bracket. So do max Roth IRA for both of you. Then do roth conversion to taken advantage of low tax btacket for this year. Wish you good luck finding another job.
sailaway
Posts: 8187
Joined: Fri May 12, 2017 1:11 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by sailaway »

WhiteMaxima wrote: Mon May 29, 2023 12:40 pm You will be in lower tax bracket. So do max Roth IRA for both of you. Then do roth conversion to taken advantage of low tax btacket for this year. Wish you good luck finding another job.
How do you figure they will be in a lower tax bracket, being that the severance lasts into December?
WhiteMaxima
Posts: 3323
Joined: Thu May 19, 2016 5:04 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by WhiteMaxima »

Go to irs web site to see your tax bracket. If you are sure you are losing your job, it is not difficult to project you combined income this year. If you company offers roth 401k and matches, you should max out the roth 401k in addition to Roth IRA.
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Max out My 401(k) Before Severance Payments Begin?

Post by MrJedi »

You mentioned you had some previous plans that do allow partial distributions, and it sounds like you left one of them after turning 55. In that case, you can already take penalty free and partial distributions from that plan you left after 55. I would go ahead and max out the 401k. If you end up needing cash in the future before 59.5, you can already withdraw from that former plan without penalty.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

Jack FFR1846 wrote: Mon May 29, 2023 12:01 pm I'll start by saying that I am Mr. Financially Conservative. Possibly the most on Bogleheads, holding 57 times spending in liquid assets and retiring in one month and holding off till 70 at which point SS for DW and me will cover 100% of our expenses. We're hoarding cash in prep of retirement with huge premiums for ACA and Medicare. We'll spend just under $70k a year in retirement and have around $250k in cash. So you might think I'd say to put it all in an emergency fund. And I would .... except when I saw that your wife is a nurse. So is mine. And although with my support (ok, pushing her), she ended working 6 months ago and she gets offers almost daily from travel nurses, Mass General, BI, small hospitals, VNA. Nurses are still in short supply and will continue to be because they are still treated like crap by employers. So your wife will not be without a job and her income can nearly support all of your current spending. In addition, in addition to the severence, you could get a throw away job at Home Depot or the like to bring in some extra money and you know what? You wouldn't even need to find another job like you were doing.
Wow! Thanks so much for your reply! Am I calculating this correctly: $70k * 57 = Super Double Wow! :happy

My wife will love reading your response later this week after she completes her three-day-in-a-row block on her high-risk cardiology floor. Congratulations to both you and your wife on what you have built together financially and for your wife providing care to so many over her career. I wish you both the very best in your well-deserved years of retirement!

About my wife...

--The best decision I EVER made, BY FAR, was asking her to marry me on 8/3/22.
--The second best decision I EVER made, BY FAR, was encouraging her to return to school after our autistic daughter's health improved and encouraging her to consider nursing as a new career path.

--The best thing that EVER happened to me in my life, BY FAR, was my wife agreeing to marry me.
--The second best thing that EVER happened to me in my life, BY FAR, was my wife giving birth to our two children.

She is the light of my life, has a heart of gold, and does so much EVERY day, in addition to her work as a nurse, to care for me and our two children.

The "Blue Chair" Budget Discussions...

Each week we sit down together to discuss if we are on track with near-term goals and tactical things that we need to accomplish together over the next week. We also look at our credit card spend and the timing of charges to maximize our cash back and cash flow. My wife absolutely HATES these discussions but has agreed, reluctantly, that they are important and needed. Like the trooper she is, she sits down next to me in a blue Ikea computer chair while we go through the numbers. In a recent session, I put together examples of how her employer was providing her with multiple incentives for her weekend hours and picking up one extra shift per week. The combined incentives (a 1.5 multiplier for hours worked between Friday evening and Monday morning, an incentive for picking up two shifts in a pay period, an incentive for working more than 40 hours in a pay week, and incentives for evening and night hours) more than double the paycheck of her regular hourly rate.

With regard to her regular hourly rate, here is how quickly that has grown just since started as a nurse here in the Midwest (St. Louis to be specific):

November 2021 (Starting as a New RN) = $25.50
February 2022 (Market Adjustment) = $28.00
July 2022 (Merit Increase of 3%) = $28.84
She is up for another merit increase this July, with the actual % TBD

My wife thinks that 57 (and even the 58 I will reach in a couple of weeks on my birthday) is WAY TOO YOUNG in her mind to say goodbye to corporate America. She is 45 so I wonder how she will feel when she turns 58! :happy

My wife wants me to try my absolute best to find another opportunity similar to my current position. Personally, I would love to say goodbye to corporate America, but I would also feel better if we could build up our savings even more, and that is much easier when both of us are working. So I am updating my resume, checking LinkedIn and other sites, and starting to reach out to my network to see if there is one last challenge for me out there. If anyone is an executive recruiter or knows a good one, please ping me in the private chat! :happy

Congratulations again to you and your wife on your retirement and thank you for responding to our post and providing us guidance!

Regards,

Joe
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by HomeStretch »

careerdata wrote: Mon May 29, 2023 12:30 pm
HomeStretch wrote: Mon May 29, 2023 11:32 am … (3) penalty-free distribution from your 401k under the ‘Rule of 55’. If your Plan does not allow partial distributions, you can withdraw what you need for a year of expenses (until you turn 59-1/2) in conjunction with a rollover of the remaining 401k funds to an IRA. …
… I think it was determined from the other postings that the "Rule of 55" is not an option for me, given that my current employer's 401(k) plan does not offer partial distributions, and I was 55 when I left my prior employer. Please correct me if I am not interpreting that correctly! …
‘Rule of 55’ distributions are allowed from any 401k plan in which you separated from service in the year you turned 55 or later. So it’s possible to have more than one Plan that qualifies for ‘Rule of 55’ distributions.

It’s easiest when the Plan allows you to take partial distributions as you can leave the remaining funds in the Plan. However, as I noted above, if your Plan(s) do(es) not allow partial distributions, you can still take one penalty-free distribution if you are willing to rollover the remaining funds into an IRA. Once the funds are rolled into the IRA, you can no longer access the funds penalty-free under the ‘Rule of 55’.

The SEPP 72(t) from a Traditional IRA would personally be my least favorite option as they can be tricky/easy to make an error.
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

HomeStretch wrote: Mon May 29, 2023 2:11 pm
‘Rule of 55’ distributions are allowed from any 401k plan in which you separated from service in the year you turned 55 or later. So it’s possible to have more than one Plan that qualifies for ‘Rule of 55’ distributions.

It’s easiest when the Plan allows you to take partial distributions as you can leave the remaining funds in the Plan. However, as I noted above, if your Plan(s) do(es) not allow partial distributions, you can still take one penalty-free distribution if you are willing to rollover the remaining funds into an IRA. Once the funds are rolled into the IRA, you can no longer access the funds penalty-free under the ‘Rule of 55’.
Thank you for the additional clarification! That is very interesting that more than one plan can qualify.

Since our projected 2023 income looks like it will prevent us from doing direct Roth IRA contributions should we stay clear of the rollover idea using the "Rule of 55"? Our two Fidelity TIRAs are currently zeroed out in anticipation of potentially doing a backdoor Roth IRA conversion for the tax year 2023. As it stands now, I don't we will need to tap any of my 401(k)s prior to me reaching age 59.5 in December 2024, but it is good to know we can take one penalty-free distribution from any of my three 401(k) plans if we find ourselves in a worst-case scenario. If we did need to take one, it sounds like doing this from the former 401(k) plan that is managed by Vanguard would be the best, as I could just take a partial distribution, and I was 55 when I left that employer.
HomeStretch wrote: Mon May 29, 2023 2:11 pm
The SEPP 72(t) from a Traditional IRA would personally be my least favorite option as they can be tricky/easy to make an error.
No assets in either of our Fidelity TIRAs right now and "tricky" sounds like a good reason to avoid it if at all possible! :happy

Thank you again for all your guidance!

Joe
Topic Author
careerdata
Posts: 329
Joined: Sat Sep 09, 2017 7:12 pm

Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

WhiteMaxima wrote: Mon May 29, 2023 12:47 pm Go to irs web site to see your tax bracket. If you are sure you are losing your job, it is not difficult to project you combined income this year. If you company offers roth 401k and matches, you should max out the roth 401k in addition to Roth IRA.
Thank you! I was plugging some of the projected numbers into the IRS "Tax Withholding Estimator" yesterday and it appears we may be withholding a bit more than needed for 2023, but it will be more accurate if I rerun it after we have both maxed out our 401(k)s, as the tool does not allow you to make different withholding amounts by specific future pay periods.

If I get my severance paid out from September through December, and my wife's biweekly paychecks stay in the current average net of $2.8k through December (they may go up just a bit after the July merit increase (the merit increase last July was 3% as reference), then the IRS tool estimates as follows:

--2023 pre-tax income = $295,627
--Nontaxable payroll deductions = $52,488 [assumes we both max out our 401(k)s]
--Net income = $243,139
--AGI = $243,139
--Total tax liability after credits = $37,916

My employer's 401(k) does not have a true-up component for the match, and even if it did, it would likely require me to be actively employed through the end of the plan year, which is not possible in this case. Additionally, my plan uses elapsed time for the vesting service method and my original start date was in September, so there would not be an additional vesting trigger hit before I leave. As a result, I think our goal on this is to just make sure I get my 401(k) pre-tax contributions to $30k by the last regular paycheck in August before my severance would start in September. After my severance starts in September, we can then adjust my wife's deductions so that she can max out her 401(k) contributions. We will try to spread those out so she gets a match on each paycheck through December.

Let me know if you think my wife and I should approach that differently!

Joe
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careerdata
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Re: Max out My 401(k) Before Severance Payments Begin?

Post by careerdata »

Wiggums wrote: Sun May 28, 2023 11:15 am Sorry for your job loss. As long as you can do a partial 401k distribution, I would put the money in the 401k. There’s really no downside to adding to your emergency fund. Also, you can start sending out resumes now. Worse that happens is you get a job offer, right?
Thank you for your reply! I have confirmed we can do partial distributions from the two 401(k) plans that I have most of our assets sitting in and it appears I can do a penalty-free "Rule of 55" distribution, if absolutely needed, from the prior 401(k) plan I was in where I was age 55 as of my last day there. That 401(k) plan is one of the two 401(k) plans I have that does allow partial distributions.

Hopefully, we will not have to use the "Rule of 55" provision or take any distributions from my three 401(k) plans until I have at least reached the age of 59.5, which will occur in late December 2024. I think we have enough emergency savings built to get us to that point, and hopefully even further out, based on all the great feedback we have received over the last several days in this thread. We will see if can squeeze out even more emergency savings between now and December after we max out our respective 401(k) plans.

I will try my best to my credentials out there and see what interest there might be. As you said, no harm in getting that started!

Regards,

Joe
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