Deferred Complans to fund retirement plans?
Individual is self employed and is awarded deferred compensation benefits during the time so employed. Once retires, he receives the deferred comp payouts over a period of years. Is he eligible to show that def’d comp as “earned income” in the year received, so that he could fund a retirement plan, or combination of retirement plans? Could he fund a solo 401k and an IRA for example?
Thanks,
-m
Permalink Submitted by Alan - IRA critic on Sat, 2015-02-21 16:26
No, because the income was earned in a prior year. Deferred comp from non govt DC plans is typically reported on a W-2. However, Box 11 of the W-2 indicates the amount of benefits earned in a prior year. This box is used by the SSA in determining whether wages were earned in the current or prior year. Similarly, Pub 590 A indicates that a “safe harbor” for earned income for IRA contribution purposes is a W-2 Box 1 amount LESS BOX 11. For govt 457b plans, a 1099R will be issued rather than a W-2 and that of course is pension income and not earned income for retirement plan contribution purposes.
Permalink Submitted by [email protected] on Tue, 2015-02-24 16:07
Thanks Alan. I the situation I’m looking at the individual is self-employed and awarded a def’d comp “bonus” while working. Then, once retired or separated, receives the def’d comp balance.; Perhaps this is a non-qualified deferred comp plan? Understand that these payments received by the now retired individual come on a 1099 misc. Does that make any difference to the question?
Permalink Submitted by Alan - IRA critic on Tue, 2015-02-24 22:14
From what I can tell, if the DC is reported on a 1099 MISC Box 7 or 15b, it should be reported on line 21 of Form 1040. It would not be considered earned income for IRA contributions or self employment income for other retirement plans. Not 100% sure though.
Permalink Submitted by [email protected] on Fri, 2016-09-23 12:49
So, this is what it says for Box 7 of the 1099 – “Box 7. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 7 may show cash you received for the sale of fish. If the amount in this box is SE income, report it on Schedule C or F (Form 1040), and complete Schedule SE (Form 1040). “. With that in mind, if it goes on Sched C, wouldn’t it then be able to be used to fund a retirement plan, like a solo 401k or SEP IRA? – m