Should You Put Your Sick and Vacation Payout Into the Massachusetts SMART Plan When You Retire?

If you’re getting ready to retire from a Massachusetts public job, there’s a good chance you’ll have a lump-sum payout for unused sick time, vacation time, or back pay.

And one of the biggest questions I hear is:

“Should I put that payout into the Massachusetts Deferred Compensation SMART Plan?”

For many retirees, the answer is yes, it can be a very smart move—but it has to be done correctly, and it has to fit your overall retirement income plan.

Let’s walk through how this actually works in plain English.

What Is the Massachusetts Deferred Compensation SMART Plan?

The Massachusetts Deferred Compensation SMART Plan is a voluntary retirement savings program for eligible state and some municipal employees. It’s a Section 457(b) plan, which means you can save and invest through:

• Pre-tax (traditional) contributions, or

• Roth 457 contributions (after-tax)

• 
  

You contribute through salary deferrals, and your money is invested for retirement. One important difference between a 457 and a 401(k): there’s no early withdrawal penalty just for taking money out before age 59½ (taxes may still apply, but no 10% penalty).

That flexibility is a big deal if you’re retiring in your 50s or early 60s.

Can You Really Defer Sick and Vacation Payouts Into the SMART Plan?

Yes. Under the Commonwealth’s rules, retiring employees may defer:

• Some of their Accumulated sick pay

• Accumulated vacation pay

• Back pay

into their SMART Plan account.

Employees who are separating from service but not retiring may defer:

• Accumulated vacation pay

• Back pay

This is straight from the state’s own SMART Plan materials.

But to do this, you must follow some strict timing rules.

The Three Key Rules for Deferring Sick/Vacation Pay

For your sick, vacation, or back pay to be deferred into the SMART Plan, all of the following must be true:

1. The money has to be something you would have received if you stayed employed

The payout must be an amount that:

• You could have used (for example, vacation time you could have taken), or

• Would have been paid to you if you had not terminated employment.

In other words: it has to be legitimately earned and payable under your employer’s rules.

2. It must be paid within 2½ months after you separate or retire

The payout has to be issued within 2½ months after you leave service. If your employer pays it later than that, it cannot be deferred into the SMART Plan.

3. You must sign the deferral agreement before the beginning of the month in which it would otherwise be paid

This is the piece that trips people up.

To defer your sick or vacation payout:

• You must have an agreement already in place

• Before the first day of the month when the payout would normally be made or made available to you

Example:If your payout will be issued in July, your SMART Plan deferral election must be signed and submitted before July 1.

Miss that window, and you lose the ability to defer that payout.

Why Deferring Into the SMART Plan Can Be a Smart Move

For a lot of Massachusetts retirees, there are some clear advantages to using the SMART Plan for their sick and vacation payouts.

1. It can help avoid a big tax spike in your retirement year

If your unused sick and vacation time is paid out as one lump sum, it can:

• Push you into a higher tax bracket

• Increase Massachusetts state income tax

• Trigger higher Medicare premiums (IRMAA) a couple of years later

• Affect ACA health insurance subsidies before Medicare

• Increase the portion of Social Security that’s taxable (if you’re already collecting)

Deferring some or all of that payout into the SMART Plan lets you spread the tax impact over multiple years instead of taking the whole hit in your retirement year.

2. You may be able to defer more than you think

Because this is a 457(b) plan, there are special rules around deferrals close to retirement. You may be able to defer more than the usual annual contribution limit by using:

• Regular deferrals from salary, plus

• Additional deferrals from your sick/vacation/back pay payout, as long as you meet the timing rules

This can give you one last boost in your final working year.

3. No early withdrawal penalty if you need to tap the money

If you retire before age 59½, accessing a 401(k) or IRA usually means facing a 10% early withdrawal penalty (on top of taxes), unless you use a special rule.

With a 457 plan like the SMART Plan, you can typically access your money after separation without that extra 10% penalty—you still owe taxes on pre-tax withdrawals, but not the penalty.

That makes the SMART Plan a powerful “bridge” tool if you’re retiring in your 50s or early 60s and need income before Social Security or before your spouse retires.

4. It doesn’t reduce your pension or Social Security

Participating in the SMART Plan does not reduce:

• Your Massachusetts pension benefit, or

• Your Social Security benefit

You’re simply choosing to defer income you’ve already earned into a retirement savings plan.

When Deferring Might Not Make Sense

There are situations where deferring your sick or vacation payout may not be the right move:

• You need the cash right away for debt payoff, major expenses, or home repairs

• You expect your income to be very low next year (and want to take the payout then)

• You’re moving to New Hampshire and want flexibility around state taxes

• You’re in the middle of a longer-term tax strategy (like Roth conversions) and need to control your income carefully

• Your payout significantly increases your final salary average (FAE) and meaningfully boosts your lifetime pension—sometimes that tradeoff is more valuable than the tax savings

This is why it’s important not to make this decision in a vacuum.

So… Should You Defer Your Sick and Vacation Payout Into the SMART Plan?

Here’s the bottom line:

For many Massachusetts public employees, deferring sick and vacation payouts into the SMART Plan is one of the most tax-efficient moves they can make in their retirement year.

But it has to be evaluated in the context of your whole retirement plan:

• Pension start date and option (A, B, or C)

• SMART Plan balance and contribution room

• Social Security timing

• Spouse’s income and benefits

• Healthcare costs (and Medicare or ACA impacts)

• Taxes over the next 5–10 years, not just this year

• 
  

Once you see all of those pieces side by side, the right choice usually becomes clear.

Final Thought

If you’re approaching retirement and staring at a big sick and vacation payout, it’s worth taking the time to decide whether and how much to defer into the Massachusetts SMART Plan.

Get the timing right. Make sure the forms are in before the deadline. And be sure the decision supports your larger retirement income plan—not just your tax bill this year.

If you’d like help running the numbers and understanding how SMART Plan deferral fits into your overall plan, I’m happy to walk through it with you.

Disclaimer: Any attachments are for informational purposes only. Investing involves risk. Principal loss is possible. Past performance is no guarantee of future success. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Different funds will have different fees and expenses. An investor should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. The highest applicable fee GWA may charge is 1.5%.

Investment advisory services offered through Guardian Wealth Advisors D/B/A Finance Roadmap Planning, an investment advisor registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA’s investment advisory services can be found in its Form ADV Part 2 or Form CRS, which is available upon request."This is not meant to be financial or tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations." GWA-25-115.