Advice on investing for a novice - am I screwed?

[sleepyheads]

I need some assistance with how to avoid, or at least minimize, being screwed by a retirement/tax issue that has come up. I am a complete novice here and have no idea what to do.

I am self employed and my ‘retirement’ contributions thus far have been with a buyin group that I worked with that had something called a 429a savings plan. Well, this company went out of business and sent everyone the lump sum of their plan, mine being around $85,000. I have no other form of retirement.

My question is, where can I put this money and how much can I put into another form of retirement/savings/Roth/etc. so that I’m not taxed like crazy on this - because my understanding is that this will now be considered as taxable income, even though it came from a savings plan. My household income the last several years has been around $150,000 between my husband and I….not sure where it is for 2022 yet or if I need to know that…it should be lower because my husband didn’t work for several months.

Any advice or information would be greatly appreciated…I am trying to get into a financial advisor at my bank, but with it being the holidays I’m afraid I’m running out of time and will get completely screwed by being taxed on this money if I don’t invest it before the end of the year. Thank you in advance!

[archiethedragon]

Dec 22, 2022 10:16:24 GMT -5 sleepyheads said:

I need some assistance with how to avoid, or at least minimize, being screwed by a retirement/tax issue that has come up. I am a complete novice here and have no idea what to do.

I am self employed and my ‘retirement’ contributions thus far have been with a buyin group that I worked with that had something called a 429a savings plan. Well, this company went out of business and sent everyone the lump sum of their plan, mine being around $85,000. I have no other form of retirement.

My question is, where can I put this money and how much can I put into another form of retirement/savings/Roth/etc. so that I’m not taxed like crazy on this - because my understanding is that this will now be considered as taxable income, even though it came from a savings plan. My household income the last several years has been around $150,000 between my husband and I….not sure where it is for 2022 yet or if I need to know that…it should be lower because my husband didn’t work for several months.

Any advice or information would be greatly appreciated…I am trying to get into a financial advisor at my bank, but with it being the holidays I’m afraid I’m running out of time and will get completely screwed by being taxed on this money if I don’t invest it before the end of the year. Thank you in advance!

Can you give any more info about the plan.  I have never heard of a 429a savings plan.  

[sleepyheads]

Sorry, it’s a 409a savings plan. That’s what the company called it. Essentially, when I bought a product from them, I contributed $100 more than my invoice to this plan and they matched at $25.

[archiethedragon]

Look into a SEP IRA. You don't have a lot of time to open one, but you could contribute up to $61k, tax deferred, which would cover a large portion of your distribution

[orval]

This article has some good info. Doesn't look like you can avoid taxes on this -- non qualified deferred compensation. My dh had a similar situation when his company was sold.

www.investopedia.com/terms/n/nqdc.asp

[mae0111]

It doesn’t look like you can roll it into an IRA or anything like that. Maybe a back door Roth for part of it?

If you continue to be self employed, you may want to look into a solo 401k. I have an LLC. I pay $160/year for 401k administration, and I can contribute 100% of my net earnings up to the fed limit. Then if it’s set up properly, there’s a profit sharing option, so you can contribute up to like $55k or something? I’m not an expert and I only work part time, so I don’t earn enough to max out the profit sharing.

The solo 401k probably won’t help you here but might be a good option in the future.

[dr.girlfriend]

Dec 22, 2022 10:50:30 GMT -5 archiethedragon said:

Look into a SEP IRA. You don't have a lot of time to open one, but you could contribute up to $61k, tax deferred, which would cover a large portion of your distribution

I think a SEP IRA is additionally limited to 25% of your compensation.  Not sure if it would include this or not.

I found this on investopedia.  Sorry, it seems like your options are pretty limited:

www.investopedia.com/terms/n/nqdc.asp#:~:text=409A%20Plans%20refer%20to%20a,yet%20received%20from%20their%20employer.

Additionally, the money from NQDCs cannot be rolled over into an IRA or other retirement accounts after they’re paid out.

Another consideration is that if tax rates are higher when the employee accesses their NQDC than they were when the employee earned the income, the employee's tax burden could increase.

NQDCs can be a valuable savings vehicle for highly compensated workers who’ve exhausted their other savings options.

On the bright side, at least the company didn't declare bankruptcy and just lose all your money.  That seems like something that could definitely have happened.