If you are one of those employees who always finishes most years with more paid time off than you are able to use,
an IRS ruling might let you turn your unused PTO into retirement savings.
To make this work, your employer will have to agree and probably modify the company 401(k) plan so all employees can take advantage of this retirement planning option, explains Lisa Berkowitz Herrnson, senior counsel for Proskauer’s New York office, an international employer practices law firm.
There are two ways an employer can set up one of these programs. In the best scenario for employees who want to maximize retirement savings, the employer can make it mandatory that the dollar value of any unused PTO will be rolled over into an employee’s 401(k) retirement plan. Because the rollover isn’t optional — nonelective in IRS speak — employees can still contribute up to the maximum amount of $16,500, plus a catch-up contribution of $5,500 if they turn 50 in the applicable year.
If you contribute an extra $1,000 per year over 10 years and it earns 5 percent, that’s a fairly painless additional $14,800 — not chicken feed, especially if you otherwise would have lost the time and money.
If your employer’s PTO plan allows employees to cash out unused PTO at the end of the year, then it can simply add the option of allowing employees to move the money they would have cashed out directly into their 401(k)s. In that case, this becomes an ordinary contribution and will reduce the allowable maximums of $16,500 and $22,000 by the amount of the PTO contribution.
This isn’t quite as good a deal for an employee, but it is still a painless way to contribute to retirement savings.
Herrnson says she hasn’t found much interest in this savings option among her employer clientele, but if enough employees ask for this retirement benefit to be added, maybe that will change.