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I retired last year (early at 55), and was recently called back in to work at my old employer as a "rehired retiree" (hourly, part time for less than 1000 hours, no prior promise of employment, etc). I am not a contractor, but rather an hourly employee working for my prior company.

I am currently receiving 5 year lump sum pension payments, part of which I receive as taxable income, part rolled over into an IRA, and with my contributions being paid out over the term, rolled over into a Roth account. I also have a 401K account from my prior employment. I have not drawn any money from any of the tax advantaged accounts, because I can live off the taxable pension payments until they end in 5 years.

The taxable pension payments pushes anything I make at my rehire job into a very high tax bracket, and that income also excludes me from individual IRA/Roth contributions.

I would like to contribute to the company's 401k account to the maximum amount possible to shield as much of my income as possible from taxes ( I don't need this new income immediately), but they say I am ineligible to contribute to the 401k because I retired. Are they right? What rule or statute is this based on?

They offer the 401K to hourly part time employees with the same number of work hours who aren't returning retirees, so it doesn't seem right that I don't get that option also.

  • Please edit your question to clarify the source of the pension that you are taking as lump-sum payments spread over five years. Is it the same company from which you retired at age 55 and which has rehired you, or a different one? – Dilip Sarwate Aug 24 '18 at 2:56
  • 'Retired' is not a legal or offical status. It just means 'unemployed, and old or rich enough to keep it that way'. So once you work again, you are a normal 'employee' again. – Aganju Aug 24 '18 at 13:52
  • I am working hourly, limited hours, for the same company as I retired and am currently drawing 5 year lump sum pension payments from. Non-rehires are eligible to contribute to the 401K under that same hourly contract and similar hours (anyone scheduled for over 20 hours/week) – Chris Aug 27 '18 at 18:30
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It seems that for some plans (depending on the plan rules and vesting) if you have a severance period greater than a year, the IRS implements what appears to be a DOL regulation that requires a rehire to have a year of service completed before the rehire can participate in a defined contribution account.

IRS form 6388 is pretty dense but references exact regulations per individual plan rule variation to your question

A benefits managers presentation in plain English - My guess is the example on slide 27 is closest to your case

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You cannot contribute to a 401k if you're no longer employed (retired). The only way to contribute to a 401k is to make deposits pre-tax from a payroll contribution or post-tax for a roth 401k.

As for your rehire aka coming out of retirement to work you are no longer retired and are a working. They sound very confused. Just because you once retired doesnt mean you are ineligible. If you earn taxable compensation you should be able to contribute that specific income pre tax to a 401k. I strongly recommend you speak with a CPA or a tax professional and they can guide you and even speak to your employer.

Here's what I would do: 1. If debt free except your home. And have a fully funded emergency fund (3-6 mos of expenses) contribute 15% of your income to retirement until you fully retire. 2. Only contribute up to the match in a 401k.
*If you are deemed ineligible which I dont think you will be there is an alternative. Roll over the 401k to a Rollover IRA (no cost to you).
3. Open a roth IRA and if married and spouse is not working open a spousal roth ira. 4. Max out roth IRAs. They will grow tax free and have no required distribution age. If both of you are over 50 years old $6500 yearly limit per roth IRA. $1k less if anyone is under 50. 5. After contributing the max on a roth everything else should be put in either your 401k or a traditional IRA. 6. All retirement accounts should be diversified and invested in proper funds depending on when you plan to fully retire. If you're planning at 70 I'd have everything in mutual funds 25% in growth, 25% aggressive growth, 25% growth and income, 25% international. Stay away from bonds especially in a rising interest rate environment they have an inverse relationship and I expect the rates to rise. There are max income rules for roths $196,000 now. Even then you can do a backdoor roth.

Seek out a investment pro who has a heart of a teacher. Not one that's trying to convince you to buy crap for their commission such as insurance investments. There are a ton of crap investments. Dont invest in anything you dont completely understand.

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