ROTH IRA AFTER EXERCISING STOCK OPTION GRANT
I have been retired for three years. I have no earned income to report for 2009.
I have several non qualified stock option grants from my former employer. In 2009, I exercised one of the options using a cashless transaction (buy and sell same day).
According to Turbotax tax-tips, the sale will be reported on a W2 and the IRS treats any gain as ordinary income (http://turbotax.intuit.com/tax-tools/tax-tips/investments-and-rental-pro…)
Question
1 – Am I qualified to open a Roth IRA for my wife and me for 2009 based on the income reported on the W2?
I have had conflicting responses. Those that say it is not qualified refer to IRS Pub 590 where it states:
Compensation does not include any of the following items.
– Deferred compensation received (compensation payments postponed from a past year).
Permalink Submitted by mk foss on Mon, 2009-12-14 23:31
The issue boils down to whether the income would be subject to social security taxes. A nonqualified stock option generates ordinary income that is reportable on Form W-2 by employees.Since you are no longer an employee, the income is likely to be reported on Form 1099-MISC as Nonemployee Compensation. Income reported in that box is subject to SE tax (the social security tax equivalent for self-employed persons) and would be compensation that supports a Roth IRA contribution.
When employees retire from a company with a deferred compensation plan, the employer accrues all of the social security tax into the final Form W-2 – that saves the employer a lot of payroll taxes because the retiree is likely to be over the social security limit in the year they retire. Deferred compensation in those instances is reported on a Form W2 with no social security tax and a deferred compensation box checked. Income from the exercise of a nonqualified stock option is not deferred compensation by the usual definition.
Permalink Submitted by Alan Spross on Mon, 2009-12-14 23:41
If you do get the W-2, there is a safe harbor for IRA contributions using Box 1 less any amount shown in Box 11. This is described on p 8 of Pub 590.
Permalink Submitted by Jerry Kiral on Tue, 2009-12-15 03:22
Thankyou for your responses. I am told that I will be receiving a W2 even though retired. I will be looking for the desired check boxes.
What would you say to these statements?
http://www.ehow.com/about_4781557_earned-income-ira-definition.html
Income must be earned during the calendar year in which the IRA contribution is applied. For example, if the contribution is for 2008, the income must have been earned in 2008.
http://www.groco.com/readingroom/invest_stockoptions.aspx
Note the term DEFERRED Income. IRS Pub 590 states no to deferred income.
Employee stock options can provide you with a substantial source of deferred incomeand permit you to control the recognition of taxable income.