Distribution from Non Qualified Deferred Comp Employer Plan – does this count as earned income for IRA contributions

So I retired a few years ago and I had some money in a non-qualified deferred comp plan at a former employer. I thought I would not access the funds until I am age 65, but they contacted me recently and said the terms say it must be paid out at age 60. So now I have $85K of income I did not plan this year

Well this has screwed my tax planning – both my wife and I are retired and our only income right now is dividends, interest and capital gains. I had planned it this way for minimal income and to live off savings until age 65 in order to receive large ACA subsidies reducing my health care cost.

So this hits me two ways – I have to pay income tax on the distribution – and I have to repay anywhere from $8K to $9K of ACA tax credits which reduced my health care premium. I have been looking at ways to lower the tax bite on both – and the only one I can think of would be to contribute to an IRA for myself and perhaps a spousal IRA for my wife. I know the Distribution from a Non Qualified Deferred Comp Employer Plan will be reported on a W-2 but I wasn’t sure if it will be reported as wages in Box 1 or Non Qualified Plan in Box 11. And if there is a difference based on which box it is reported in on whether the IRS considers that earned income that can be counted towards making an IRA contribution. Does anyone know the rule here. I searched everywhere and can’t find any guidance. Thanks

If it does count as earned income, and I contribute the max $7K to an IRA for myself, it saves me $2500 in taxes (both regular income tax and from the ACA tax credit repayment). Double that if I contribute a spousal IRA. I do realize that this just pushes these taxes off down the road but my planning was based on maximizing the ACA subsidy to minimize healthcare premiums until we hit age 65.

Thanks



The amount of earned income shown in Box 1 of the W-2 must be reduced by the amount shown in Box 11, used to show the amount of income earned in prior years. Unfortunately, I expect that the Box 11 amount will result in your not being eligible for IRA contributions due to lack of earned income.

Shoot – not the answer I was hoping for.  I guess I just have to bite the bullet this year.  Thanks for your answer and advice, I appreciate it !!!

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