Gotta question that hopefully some tax experts can shed some light on.
I teach at a community college and am about to retire. The college has budget issues so offered a retirement incentive of $23K to six faculty and I was one of the six faculty chosen/qualified.
We have 2 options as to how to take the incentive. We can:
1) take the $23,000 as an employer contribution into a 403(b) account thus sheltering it from taxes until withdrawal;
OR
2) take it as a taxable cash payment in our final paycheck
Here's the question. The faculty union is advising us to take option 2 (taxable cash payment) because they aren't sure if #1 is legal under IRS rules.
So I'm inclined to play it safe and go for option #2. I've been maxing my 403(b) contribution for the last couple years and by the time the incentive is actually paid in my last check in early August, I will be around $9000 shy of my full $22,500 (I'm over 50) contribution for 2012. So I thought I'd top off my 403(b) one last time to shelter at least the $9K from taxes. I do have a use for the rest of the cash; I'd like to put it into beefing the insulation and replacing the remaining single pane windows in my house.
But still, the idea of the whole $23K going in as an employer contribution is appealing; I just have no desire to tangle with the IRS at some point down the road.
Any insight among you tax-savvy Mustachians as to how the IRS would feel about option #1? Thanks.
