Listener Questions: Taxes, Pensions, and Beneficiary IRAs, Ep #155

Let’s wrap up 2023—and kick off 2024—with another round of your questions, answered! In this episode of the Retirement Made Easy podcast, I’ll answer six listener questions, covering everything from how severance pay is taxed to how the pop-up feature on pensions work. I’ll also share my thoughts on what 2024 has in store. Give it a listen!

You will want to hear this episode if you are interested in…

  • [2:07] Question #1: What happens to unvested 401k money?
  • [5:31] Question #2: How is severance pay taxed?
  • [7:38] Question #3: What is the outlook for 2024?
  • [12:22] Question #4: What is the pop-up feature on pensions?
  • [16:06] Question #5: How do you convert a beneficiary IRA?
  • [19:48] Question #6: How does tax mapping work for my clients?

Question #1: What happens to unvested 401k money?

What happens to unvested money in a 401k if you quit, retire, or your company makes massive layoffs? 

If someone has unvested dollars in their 401k, that money is generally forfeited. However, if a company lays off a large portion of their workforce (20% or more), it’s a totally different story. It can trigger a partial termination of the 401k plan. All of the unvested dollars become vested for the people who are laid off. 

I’ve worked with a number of people who have slightly delayed retirement because they know layoffs will happen or early retirement packages will be offered. These layoffs/retirement packages can be accompanied by health insurance packages, COBRA, severance packages, or even company stock. 

Question #2: How is severance pay taxed? 

Julie is 62 and her company is restructuring. They’re offering her eight weeks severance pay. How is severance pay taxed? 

Severance pay is taxed as ordinary income. You will commonly see a 22–25% withholding. Ask your benefits department, because the withholding is typically automatic. It typically aligns with your W4 and isn’t taxed as bonus pay. 

I would also find out if your company pays out your sick days or unused vacation time. Schedule a meeting with your financial planner to make sure you have everything in line for your retirement. 

Question #3: What is the outlook for 2024?

A lot of people are still predicting a recession in 2024. Many expected it in 2023 but it never happened. We actually saw GDP growth of 2.1% in the 2nd quarter and 4.9% in the 3rd quarter. The market liked the Fed announcing that they’re going to stop raising interest rates and are expecting three rate cuts in 2024. Those two announcements have driven the Bull Market we’ve experienced since Halloween.

But there are still a lot of unknowns. The market doesn’t like uncertainty during Presidential election years and tends to be more volatile. And on average, the market slightly underperforms. Lowering interest rates will mean good things for the stock market and the economy. But will they cut rates three times? We have to wait and see. 

Question #4: What is the pop-up feature on pensions?

Missouri has one of the best teacher’s pensions in the country. A “single life” pension will pay you as long as you’re alive. But when you pass and if you have a surviving spouse (let’s call him Bob), the single life option doesn’t provide anything for the spouse. Let’s say the amount is $1,000 a month. 

Some pensions offer a 100% Joint-and-Survivor option. This might offer $700 a month for the rest of your life and the surviving spouse would get $700 for the rest of his or her life. The pop-up feature works like this: If Mary outlives Bob, the $700 would pop-up to $1,000 per month (what she would have originally gotten). 

How do you convert a beneficiary IRA? How does tax mapping work for my clients? Listen to the whole episode to learn more!

 

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