Buyout option to save taxes

New options in the GM buyouts include 401(k) rollovers and annuities.

THE VINDICATOR, YOUNGSTOWN

By DON SHILLING

VINDICATOR BUSINESS EDITOR

Local financial planners like a tax-saving option that General Motors is offering in its latest buyout package.

Workers with at least 30 years of service can avoid an immediate tax hit on their buyout payment by rolling the money into a 401(k) savings plan.

“The one question is, ‘Do they need the money now?’” said Jeff Davies, a certified financial planner and owner of the Moors & Cabot office in Liberty.

If not, putting the money into a 401(k) plan would be a good option for many workers, he said. A GM skilled trades worker would avoid a tax payment of roughly $12,000, he said.

The GM plan that was announced Tuesday offers production workers with at least 30 years of service $45,000 to retire, while skilled trades workers would receive $62,500. If the workers take the cash option, they will have to pay taxes on the buyout.

GM plans to explain the program to workers in coming weeks. In a buyout plan offered in 2006, workers with at least 30 years service received $35,000 payments and had to take it in cash.

With a 401(k) plan, taxes are deferred until the money is withdrawn so more money is invested and has a chance to grow, Davies said. In addition, if a person’s tax rate is lower when the money is taken out, less tax would be paid.

The GM program is structured so that normal limits on 401(k) contributions are bypassed and all of the buyout payment can be placed into a 401(k).

James F. Shively, a certified financial planner and co-owner of Shively & Associates of Cortland, also suggested that most GM retirees consider the 401(k) but added that another new option will be attractive to some.

GM is allowing workers with at least 30 years service to invest their buyout payment into an annuity that would provide monthly payouts until they die. It will include a lower payout amount if the worker chooses to provide payment to a surviving spouse.

The annuity payments would vary depending on the worker’s age. They are calculated based on average life spans.

The advantage to the annuity is that is predictable and easy, Shively said. The payments are guaranteed as long as the worker lives, so there is no risk of their being lowered by poor investments, he said.

Workers who live a long time would receive more than the buyout amount of $45,000 or $62,500, he said. But if the worker and a surviving spouse die in the near term, they would receive less money than the buyout amount and there would be no money left for an estate.

Shively and Davies said that no one option is best for everyone and suggested that workers talk to a financial planner before deciding.

Also new to this year’s buyout program is an option for workers who are 50 years old and have at least 10 years of service. They can retire at a reduced pension but with health care benefits.

Another slight change involves workers with 26 years’ experience. In the 2006 offer, workers with 27 to 29 years of service could stop working, take reduced pay and then receive full retirement when they reached 30 years. This now includes workers with 26 years of service.

The offer for the rest of the workers remains the same. Workers with more than 10 years’ experience can receive a pre-tax payment of $140,000 to separate from the company, while those with less service would receive $70,000.

Shively said he advises people to be cautious about taking cash payouts. First, taxes will take away a sizable part of the payment, he said.

Plus, he said, some of the people who took buyouts from GM and Delphi Corp. in 2006 found the money didn’t last long.

“When you get $90,000 in your hand and you’re not used to that kind of money, it can be very dangerous,” he said.

shilling@vindy.com