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this is a tax law question. my job was eliminated last year

Customer Question
(dec. 09) I received a...
this is a tax law question. my job was eliminated last year (dec. 09) I received a severance package at the time, a small amount of which was applied to last year and the balance paid in Jan 2010. Taxes were taken out of both checks at a very high rate, much higher than i have been paying for wages on W2s. I was told by HR that this compensation followed a different rule than my wages. I still do not have a job, although looking, and am surviving on unemployement compensation. I will also begin collecting SS this year, although I need to work to add to my retirement. How much of my 2010 income can I put into my pre-tax 401K account in 2010 on my tax return to add to my retirement savings. I'm 66.
Submitted: 7 years ago.Category: Tax
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Answered in 13 minutes by:
7/2/2010
Tax Professional: Merlo, Accountant replied 7 years ago
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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HelloCustomer

 

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.

 

If this was helpful please press the Accept button. It is the only way we receive any credit for helping with these questions.

 

Thank youCustomer/p>

 

 

Merlo
Merlo, Accountant
Category: Tax
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Customer reply replied 7 years ago
one more clarifying point - i rolled over the 401K into a Traditional IRA, so that is what i would be contributing to. what you are saying is that i could contribute$6000 or whatever earned income (whatever is less) tax free to my traditional IRA?
Tax Professional: Merlo, Accountant replied 7 years ago

Hello againCustomer

 

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.

 

If this was helpful please press the Accept button. It is the only way we receive credit for helping with these questions.

 

Thank youCustomer/p>

 

 

Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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