As everyone knows, life gives you little “surprises” now and then, and folks have to be flexible and learn how to “roll with the punches” when that happens. Sometimes it’s pleasant surprises (hey, my company is giving out one-time bonuses) and sometimes it’s not (hey, my basement flooded).
Just recently, I found out that my company made a change to their deferred income (one of the ways they help with retirement planning). Previously, you could draw it in equal parts over a period of time (I believe the max was over a 5-year period). That was my plan, as it would enable me to keep the taxes on it low, and stay under my threshold for medical care (hopefully).
Well, apparently at the beginning of the New Year, they killed that option. Instead I have to take it as a lump sum when I leave the company. So, when I currently plan to hit FI (26 months away) I will take a sudden, massive $200K bump in my pay (in addition to my first six months pay for 2020). The taxes taken out will be nothing like I’ve had to pay before. Ouch!
I took out my pencil and paper (or computer and mouse) and started the calculations. I would end up giving up roughly $50K to Uncle Sam, just on this money alone. Yet, once I had paid it out, that money would become “post tax” money, so if I used it to live on over the next several years, I wouldn’t have to state it on my income taxes (just any interest/capital gains if I had invested it). If you remember the update to my draw-down strategy, I was very concerned about going over the $64K line for income, as this would cause me to lose subsidies for health insurance. I could use Cobra insurance (the insurance you can get from your former company for up to 18 months after you leave your job) – and then transition to paying my own insurance, with the subsidies.
Well now, I will have a pot of $150K (plus the expected $90K in my investments) that is post-tax. Even if Mrs. 39 Months works for several years, I don’t see a reason why we can’t keep under the $64K cap. If she gets a really great job, then I’ll just force her to pay for benefits!
So in the end, it all ended up being OK. Actually better than OK – because the money I save for the subsidies more than offsets the additional up front taxes.
So always look at your finances and play off different scenarios. If I had, I would have determine that, even if the company still had the 5-year stretch out option, it was better to take the money up front.
How have you made lemonade this year!
Mr. 39 Months