Cashing out leave and putting it in a 457

[muckamuck]

What is the name of your state?What is the name of your state? Alaska

I'm 52, planning on retiring in two years and will have about eight months of vacation worth $41K to cash out when I go. My employer allows me to add this to my 457 Deferred Compensation Plan under the "catch-up" provision. If I want to do this I should be starting now. The current DCP balance is $177K. I also have a 401a with $262K and $107K in other savings, about half IRAs. My income in retirement will be greater than my income while working because I will not be saving as much. The base retirement benefit will be $42K plus what choose to withdraw from savings. My adjusted gross income for tax purposes was $35K in 2004.

If I wait to cash out my leave when I retire I may be able to add it to my "high three" years for calculating my retiement benefit increasing my base retirement benefit to $47K. This is the subject of a law suit and has been tied up in the courts for years. I have no idea when they will make a decision and which way it will go.

But I figure I might as well wait because I will be in the same 25% tax bracket when I retire whether I put it into DCP and take it out over years or cash it all out at retirement and pay 25% in one lump sum. Is this correct? Is there something I'm failing to consider?

[Snipes5]

Well, one thing I can think of off the top of my head is that tax rates are lower than they have been in a long time, and there's no guarantee they'll stay that way. And I do mean tax rates, not interest rates, which are also low.

Also, you don't say whether you have mortgage interest, etc, and itemize deductions, but if you do, it's quite possible that your deductions will be less in later years, thereby making it better to take the income in a lump sum.

There is also the possibility that your company will go belly up, as so many have in recent years, unless you work for the Government of course. You could split the difference, there's no reason you have to do it all one way or the other.

Snipes

[muckamuck]

I didn't think about taxes going up in the future but that's a good point. I have a mortgage now but the interest rate is very low. I may want to buy a second house after I retire. I work for the state government so I don't have to worry about them going belly up. Thanks for the reply.