Q&A: "I am Retiring and Getting $10,500 for Sick Days I did not Use. I Don't Want to Pay Taxes on it Immediately. Ideally, I Would Like to Have Access to it in 2 Years and Pay Taxes on What I Use. Do you Have a Suggestion?"

Question:

I am retiring and getting $10,500 for sick days I did not use. I don't want to pay taxes on it immediately. Ideally, I would like to have access to it in 2 years and pay taxes on what I use. Do you have a suggestion?

Answer: 

You don't have a lot of flexibility since it's governed at the employer/payroll level. 

Having said that, if you have a 401(k), 403(b), 457(b) or similar retirement plan through work and haven't already contributed the maximum, then I'd talk with HR/Payroll to see if you can make a one-time increase in contributions through payroll.

You'd increase contributions one time by the full $10,500 unless that puts you over the annual maximum (or your earned income for the year). Then coordinate it to land on the same payroll date that you receive the sick pay. 

If you can do that, you'll side-step taxes on the sick pay now, plus you'll only pay taxes when you withdraw from your retirement plan (or from an IRA that you roll the plan into).

You mentioned drawing some funds in two years. If you'll be under age 59 1/2 at that time, then you may want to leave some or all of the funds in the employer retirement plan to avoid the 10% early withdrawal penalty that applies if you draw from an IRA before age 59 1/2. 

In 2014, folks age 50+ can contribute up to $23,000 of earned income ($17,500 + $5,500 age-related catch-up) to their retirement plan through work. (Limit is $14,500 for SIMPLE IRA plans through work).

Hope that helps. Best wishes for your retirement!