Tax Guy: My job is being eliminated and I will get a severance package. Is that considered income for IRS limits on Roth IRA contributions?

by | Jan 27, 2023 | Stock Market

Dear Tax Guy, I know my job is being eliminated at the end of March 2023. I will receive a severance package paid out over a period of almost one year. I understand I will not be able to make 401(k) deductions from my severance once I stop working. Because of my severance and my existing cash flow, I could comfortably make the full $22,500 contribution to my 401(k) by the end of March.

My company will only match my contributions up to 6% of salary so there‚Äôs no additional matching benefit for contributing to the IRS limit. I am anticipating it could take me a while to find a new job so I am looking to maximize my contribution. Is my severance considered income for the IRS income limits on Roth IRA contributions? If I am below the income limit, is there any circumstance where it would be more advantageous to contribute less to my 401(k) and contribute something towards a Roth IRA? What if I contribute the full $22,500 before my old job ends, and then I ge …

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