The Independent Investor: Attention Workaholics: Contribute Vacations Days to 401(k)
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It is remarkable how few people are aware of this change since it is a benefit that applies to many qualified plans including 401(k)s, Keogh and profit-sharing plans. It does not, however, apply to IRAs or SEP-IRAs. And while the new rules do not currently extend to 403(b) plans (available to educational institutions and some non-profit organizations), they may in the future, according to the Treasury.
The rules include "cash-outs" or taking cash in lieu of yearly vacations, sick leave and/or personal days, or when an employee leaves a job. As long as your employer pays for these days or at least part of them, you can contribute the cash equivalent to your retirement plan. But remember, the maximum contribution limits still apply which is $16,500 per person or $22,000 for those over 50 years old.
From the company's point of view, employers that don't currently pay workers for unused holidays might want to rethink that policy. First, this benefit will not increase your worker's base pay. Second, companies can opt only to pay for this unused time if they put the money into the worker's 401(k) or other qualified plan. By compensating workers this way, the employer encourages savings since the worker either agrees to save or loses the benefit. And while your company must offer the choice as an option to all their plan participants, you don’t have to offer it every year.
A company can also prorate or limit the amount of vacation they would be willing to pay for. It is still a little murky on whether this money will qualify for an employer "match" so it would be best to check with your plan sponsor.
Although the vacations benefit occupied most of the news press, there were a few added initiatives included as well. Employers, for example, will be able to automatically enroll new employees in their retirement plan. This rule targets mainly younger workers who all too often, when given the choice, opt out of saving for their retirement to their long-term detriment. Now, by automatically enrolling workers, the onus is on the employee to discontinue the savings plan. Studies have shown that once enrolled, few employees will go to the effort of deliberately reversing enrollment.
The new rules will also allow taxpayers to use their income tax refund to purchase U.S. Savings Bonds. That's good for the government but would probably not be the right investment to meet most savers’ long-term goals. The money would be better invested in an IRA, for example, unless special circumstances indicated otherwise. Finally, the government is going to try and tackle the complicated language used in explaining why it is dumb to cash in your 401 (K) between jobs.
The hope is that by explaining the downside in "laymen's terms" more people will resist the temptation to spend their retirement savings. I will give the Feds an "A" for effort, but if they really wanted to make a change in people’s behavior they would stiffen the rules (and penalties) for withdrawing money from your 401(K) except in emergencies.
All-in-all the new rules should benefit savers on the margin. For us workaholics, it is a great deal. I wish I had a dollar for every hour of unused vacation time I have given up in my career. Don't you?
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net Visit www.afewdollarsmore.com for more of Bill’s insights.
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