Episode 59 – Cash-out strategies for your leave balance
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re looking at leave cash-outs. And for anyone who’s either getting ready to retire, or maybe you’re just leaving public employment and moving to the private sector or whatever that choice is. A lot of people choose to cash-out their annual leave or their sick leave, but there’s obviously a lot of other, maybe not so obvious, a lot of other options out there for your leave to be able to roll that over into, programs like DCP.
So we’ve brought our guest, Maila, back on the program today to talk more about what you can do with your leave. Thank you for being here, Maila.
Malia
Thank you, Jenny. Yeah, exactly right. One of the things we’re talking about and really focusing on today is if you want to put your leave into the Deferred Compensation Program, DCP and how you would do that, why you would want to do that and kind of what that looks like.
So, to kick it off, I’ll just start with the obvious: why would I want to do this? And I think one of the biggest reasons for most people is the tax savings advantage. So, you may be retiring. You may just be leaving and going to another job. But for a lot of people, you may have a very large balance of vacation leave or some kind of leave. That’s going to be quite a sizable chunk of money.
And that could be enough to even push you into a different tax bracket. And so being able to put that somewhere where it can be invested tax free is really going to help you out. And so, you don’t have to pay taxes on it at that time.
Also, there’s some people who they just don’t need the money now. They’re like, “if I have that money in my bank account, I’m going to go shopping and I just don’t need to do that. So, let’s put it somewhere safe where it’s going to be invested for my future.” So that’s another big reason.
And I mentioned the tax savings – you can do Roth contributions into our program with your leave cash-out. However, there’s some things to consider around that because the rules around Roth when you might be taking your first distribution, if this is your first ever contribution into Roth, you know you don’t really get the full benefits of the untaxed gains unless you have it in there for the five years and wait until you’re 59 and a half. So, those are just a couple things to think about.
And you can always call us and talk to us more about that. But for those that are retiring, I would say also this is your last opportunity to build up that DCP account. I think when we start looking down the face of retirement and thinking, “oh my gosh, I didn’t save as much as I had hoped to save.”
This is a really great opportunity to just get that one last push in there, try and pad that balance a little bit before you go. And then last but not least, I think it’s really important to say that [it’s] flexible you have options. You don’t have to defer all of your leave into Deferred Comp. You could say, I’m going to take $5,000 of that and I’m going to buy a new car. You’re not going to buy a new car for $5,000. Maybe you’re going to…
Jenny
…go on a vacation.
Malia
Maybe buy a very used car for $5,000, and then the rest of it you’re going to put into your Deferred Comp, but maybe you have some plans for some of that money. Bottom line, you don’t have to do all of it. It’s not an all-or-nothing. You have a lot of flexibility with that.
Seth
I think that’s a really good point too Maila, that people who are leaving their employer might be at very different stages in life, and for a 25- or 30-year-old, using that leave might be really helpful to pay off credit card debt or, you know, build up an emergency fund or something like that. But there’s a lot of different things to take into consideration.
And one thing I wanted to ask you about, I’m sure we’re going to repeat this a number of different times, but what kind of leave would a person consider? And, you know, are we talking about vacation leave? How much of this is dependent on how old you are, young you are, what employer you work for? So, if you just want to expand on that.
Malia
That’s a great question. And my reoccurring theme throughout this is going to be, number one, you’re going to want to talk to your employer about what you’re eligible to do. Typically for the most part, vacation across the board is something that can always go into the plan. However, you might be under some kind of collective bargaining agreement, a union contract that dictates what you can and can’t do with your leave.
So, a lot of employers sick leave, for instance, which is usually the balance we have the most, as you have to put it into something else, such as a VEBA account, which is where basically it’s used for medical premiums and things like that. Your employer may say it has to go in there. Some employers say it’s okay to go into Deferred Comp, and some even say the rate is different.
So, vacation leave, typically we get paid out one for one. So, each hour you know you’re getting paid on the dollar for. Sick leave oftentimes is a lower rate. For a lot of employers it’s $0.25 on the dollar or 25% rate. But some even say if you put it into Deferred Comp, we might give you 35% instead of 25%.
And so giving you a little more bang for your buck if you put it into there. But ultimately, that’s all going to be in if you have some kind of union contract and your employer can tell you exactly what you’re eligible for. Generally speaking, a lot of state agencies — I know we have a lot of public employees who listen to this — do VEBA for sick leave and vacation is ok.
You may also have lots of unique types of leave like comp time, holiday pay, I know some people get merit pay, things like that. Those may be allowable to go in. But again, check with your employer because ultimately the only thing we’re getting from you is the specific dollar amount. So you’re just telling us, put this much money from this check into the Deferred Compensation Program. What you are and aren’t eligible to do, your HR department or your payroll will be able to answer those questions for you.
And then I just want to add a little brief note, like Seth, to your point, people are in different stages of what they’re looking at. And so there are some opportunities some employers even have where maybe you’re not leaving or retiring, but you just have a really large, sick leave balance. There’s some that allow cash-outs throughout the year with certain caveats put into place.
So again, check with your employer. Maybe that’s something that you’re eligible to do. And then of course there’s all the rules around what kind of separation you’re doing. A lot of employers say if you’re just leaving and you’re not actually retiring, you can’t get any sick leave cash-out at all. So obviously that would not be an option for you.
Only your vacation, potentially comp, holiday, merit leave would be able to go into the plan because that’s the only thing you are allowed to cash-out, period. So, HR, payroll, like I said, it’s going to be part of the theme of this chat is going to be your best friend for seeing what you can and can’t do, because we have so many different employers and they all have so many of their own little roles.
Seth
And I know we’re going to do a future episode about VEBA specifically. You know, lots of people have questions about sick leave, cash-outs and how they can use that. We’ll tackle that in a separate episode down the road.
Jenny
And then, Malia, how much could a person potentially roll over? Like you said, you might have an annual leave balance that would equate to several thousands of dollars. How much could I potentially put into my DCP account?
Malia
That’s a great question. And right off the bat, let’s just start with that there is the IRS annual limits for your Deferred Compensation account. So, you’re never going to be allowed to put more than what that annual limit is. And I’ll go over those in just a second here. So because of that, it’s really important that you plan ahead.
Start thinking about this early. I think a lot of people kind of know, for the most part, “I think I’m going to retire in a few years or this job ain’t it for me, I’m looking for something else,” and you kind of have in mind that these events might be coming up. And so, plan as early as you can, because any contributions you make during the year are going to also count against that annual limit.
So if you’re leaving in like November and you’ve been putting in a whole bunch of money into your Deferred Comp throughout the year and you’re really close to that annual limit that the IRS sets, you might not be able to do very much of your leave, vacation, cash-out, things like that, because you just don’t have enough annual limit left.
And what are those annual limits look like for a lot of people? If you’re leaving and you’re under the age of 50, and this is specific to 2025. So, if you’re listening to this in the future, these limits may be different. And they’ll be posted on our website. But for 2025, if you’re under 50: $23,500 is the total you can do.
Whether you’re doing Roth or pretax contributions, that’s the grand total. So, anything you put in through your paycheck as well as potentially this leave cash-out contribution that’s the maximum for that year. If you’re over the age of 50, then $31,000 is the total you can do for the year. And some of you — specifically talking to my group that’s retiring here — if you’re within so many years of retiring, there’s also a special catch-up program that could let you potentially even go as high as $47,000.
So maybe you have a lot of leave, and maybe your employer also lets you do your sick leave into here. And that’s something that you want to look at. Give us a call, talk to us about that. We can tell you if you’re eligible for that program. We’re not going to dive too deep in that right now, but that could be an option as well. But for most people, you’re looking at $31,000 or $23,000 is the total limit that you can do for the year.
Jenny
So obviously people have varying amounts of leave. How would they know how much leave they have available to contribute?
Malia
Back to that recurring theme, it’s so important to talk to your payroll or HR department because they’re the ones who know this information. I’m going to preface it by saying we have no access to your hourly rate. We have no access to what your leave balances are. You do not want us to make that up and put some arbitrary number in.
So please talk to the people who know which is your payroll or HR department. And the other thing that’s really important to know is if you put this money into Deferred Comp, let’s say you take the pretax option because you want to save money on taxes. This money, while it wouldn’t be taxable, is Social Security and Medicare eligible.
So that does have to come out of it. And then the portion that comes out IRS withholding comes out on it. I know it’s kind of weird to follow, but that is what we have to do. So, it’s not as simple as you saying, “oh, well, I know I make $20 an hour and I have 200 hours of vacation on the books, so I’m going to just write $4,000 here, and you guys are going to put $4,000 out of my check in Deferred Comp.” Because of those mandatory taxes…
We also have a couple of state taxes that are mandatory to come out, it may actually look more like $3,500 that’s available to go into your Deferred Compensation. So please, please, please check with your payroll or HR department to see. They can work out those numbers for you and help you figure that out. Likewise, if you’re doing Roth, they can help you figure out what taxes are coming out.
We don’t know what your tax withholding rate is, and so they’re the ones who can help you decide on that. And I’m going to say here too, because if you do the wrong amount, while we may try to fix it in time, if we can, we can’t always guarantee it.
You may not realize until you’re looking at your pay stub online the night before the check actually goes and go, “oh my gosh, I put $5,000. But this check is only going to be, you know, $4,000” or whatever it may be. Unfortunately, we’re not able to fix it at that point. It’s too late. So again, really make sure with your employer. And if that does happen, there might be some distribution options available for you, once you leave and you’re terminated, you can take money out.
Or if you’re over 59.5, you can do what’s [called] an in service [withdrawal]. But these things take time. And so, it’s better to just take that extra step, make sure you do it right and get the amounts right. So that way what you want to come out is coming out.
Jenny
That’s great. I like that clarification. And just in case people are wondering how much they actually have available, it obviously really depends on that rate. Yeah. And then I guess the final piece is just if there are folks that are thinking about this, but maybe they don’t have a DCP account, could they still potentially open one?
Malia
Yeah. So, you know, in a perfect world, all of you have Deferred Compensation accounts and are saving. But we recognize that maybe it’s not something you even thought about or considered. And that’s a really fun thing about this, is this can be your very first contribution into your Deferred Comp account. On the form that you fill out…
It does say that it can be an enrollment form. So, we’ll put it into, basically as if you were defaulting into a fund. We’re going to put it into the appropriate retirement strategy fund for your age, and that can be your very first contribution and your only contribution into the plan. Because, again, maybe you were not prepared to have an extra $10,000 in cash that’s really going to mess up your taxes or something.
So, you can absolutely do this as your very first and only deferral into the plan.
Seth
Yeah, and Malia, you mentioned that there’s a form. Can you just explain to folks they’ve listened to this. They’re ready to do it. They know they’re going to have a cash-out coming up. What are the steps that they would take to execute on this?
Malia
Sure. So, out on the DRS website in the forms section under more forms, there is one that we have that’s called DCP Lump Sum or Leave Cash-Out Deferral. And it’s a pretty simple form for you to complete. It just asks kind of the basic questions. And then you’re going to put in two specific details which is the amount as we talked about earlier, which you’re going to work with your payroll or HR for.
And then the cash-out date. So, we need to know what check is this coming out of. And again, please check with the payroll or HR what date that’s going to be. Because if you put the wrong date some places, some employers, don’t pay out your leave on your last paycheck. Sometimes they do it on the paycheck after your last one.
So, I’ve seen people put their last paycheck on these forms, and then their last paycheck is not enough to be able to sustain this cash-out because they’re not cashing out 200 hours of leave. So please check with them on what date that’s going to be. Again, we have so many employers. It can be different for everyone. So, make sure you know from them.
So those are the two things that you’re going to put on there. We do ask that you turn it in 30 days before that cash-out date. So, we have time to set it, up for you. Once we get it and we have it all filled out, we’re going to input it into our system. Usually it takes about 10 business days for us to process.
We try to do it sooner, but it can take up to that amount of time. And we do send an email to the email address that you put on that form to you, as well as your employer to say, this cash-out was set up, or this larger deferral is being set up for you. So be on the lookout for that, because that is a great last chance opportunity to make sure it’s right.
Maybe that’s the moment you realize, “oh my gosh, I put $25,000 and I only have $2,500 on the form.” That’s where you want to see that email. Make sure that you didn’t make a typo or have any issues like that. Respond to that, because that’s when we’re going to be in that window where we really are able to make those corrections for you.
So again, pretty simple form. But if nothing else from today, just remember these things. Plan ahead. Be thinking about this in advance. Don’t wait until your last day to do this. Be thinking you know when you’re putting in that notice, all of those things. Or if it’s retirement, when you start thinking further out, be thinking about it. Because timing what you’ve done for the year, all these things can impact it.
And last and certainly not least, work with your employer on the amount and the cash-out date. If you remember nothing else from this podcast, just remember that last thing when it comes to putting your leave into Deferred Compensation.
Seth
Great. Thanks for joining us.
Malia
Yeah, thanks for having me.
[music outro]
Disclaimer
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