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You cannot continue to contribute to your former employer's 401k plan based on the fact that you receive some severance pay from them in 2010. Lump sum severance pay is subject to different rules, and does not allow for you to make any 401k contributions.
You could, however, contribute to a traditional IRA account for the year. For the 2010 tax year at age 66 you are allowed to contribute up to $6,000 to a traditional IRA or the amount of your earned income for the year, whichever is less.
When you receive lump sum payments, generally the employer taxes those wages at a flat 25% for federal tax purposes, which may be higher than what you will actually owe for the year. If that is the case, next year when you file your 2010 tax return, you will get a refund for any taxes which were over withheld from that severance check.
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Yes, that is correct. The severance pay that you received in 2010 will be counted as earned income. So you can contribute a maximum of $6,000 to your IRA or the amount of your earned income, whichever is less. Whatever you contribute will then be deductible from your taxable income for the year.
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