Eligibility For Roth IRA – Does Stock Option Sale Qualify
I have been retired since 2006.
No earned income in 2009 except as noted below.
I want to add to a Roth IRA for 2009 based on the gain from the following transaction as qualifying compensation:
In 2009 I did a cashless exercise of a nonqualified stock option grant from my prior employer.(buy/sell the same day)
I paid Federal, State, SS, and Medicare taxes on the gain.
I received a W2 showing the gain in box 1, 3, and 5. Box 12a includes gain plus Code V (sale of nonqualified stock option)
Question:
Is the gain deferred compensation?
If so, I will not be able to add to the Roth as deferred compensation is not eligible for a Roth IRA (Pub 590)
I believe the following supports my belief it is not deferred compensation:
– When I enter the W2 info in TurboTax. TurboTax shows that I am eligible for a Roth.
– From an internet search – Nonqualified stock options (“NSOs”) issued with an exercise price of not less than fair market value (“FMV”) on the date of grant are not considered a deferral of compensation and therefore are not subject to Section 409A.
I’m not sure my supporting information could withstand IRS objections.
– What say you?
– Can anyone site IRS or other documentation to support that the gain from the nonqualified stock option is not deferred compensation?
Permalink Submitted by Alan Spross on Fri, 2010-02-19 05:08
It qualifies as earned income. You have your W-2 and a W-2 figure of Box 1 less Box 11 is a safe harbor as earned income for IRA contribution purposes. See Pub 590, p 8, “Wages, salaries, etc”.
Permalink Submitted by Jerry Kiral on Sun, 2010-02-21 08:05
Thanks alan…
I think it is clear that the gain is “Compensation” (or Earned Income).
The problem is finding a document or argument that states the gain is not “Deferred Income”
Seems it will be hard to argue that it isn’t.
Permalink Submitted by Alan Spross on Sun, 2010-02-21 23:37
Since the W-2 figure is a safe harbor (Box 1 less Box 11), the only issue to debate might be that this income should appear in Box 11, thereby reducing taxable compensation for IRA contribution purposes. But the W-2 Inst. clearly indicate that such plans are NOT considered NQDC plans and therefore should not appear in Box 11. The following is copied from the W-2 Inst for completing Box 11:
>>>>>>>>>>>>>>>>>>>>>
Unlike qualified plans, NQDC plans do not meet the
qualification requirements for tax-favored status for this
purpose. NQDC plans include those arrangements
traditionally viewed as deferring the receipt of current
compensation. Accordingly, welfare benefit plans, stock
option plans, and plans providing dismissal pay, termination
pay, or early retirement pay are not NQDC plans.
>>>>>>>>>>>>>>>>>>>
Perhaps the distinction with the NQSO is the risk of forfeiture, which does not occur with a standard NQDC plan. Note the other plans that are treated the same as the NQSOs.
Permalink Submitted by Jerry Kiral on Mon, 2010-02-22 17:16
Thanks alan
I’m planning on making the Roth contribution for 2009.
I’m surprised that there is so little on the subject on the Internet.
One would think no one has thought of this before.
Permalink Submitted by Patricia Sheldon on Sat, 2011-03-05 16:20
I have non-qualified stock options that I had to exercise this year. I called the IRS and talked to them to find out if non-qualified stock options were eligible for a Roth IRA and they couldn’t answer my question. I talked to specialist in the non-qualified stock options and Roth IRA section. They said they would have the question written up and it will take about 15 days for a reply. I know they are taking out federal and state tax and also social security. I would definitely say this is considered compensation.
I found this on 2 websites on the internet.
The difference between the exercise price and fair market value of the stock is ordinary income included in your W-2.
If your income is solely from exercising non-qualified stock options. When you exercise a non-qualified stock option, the taxable component of the option exercise is considered taxable income, and therefore is eligible for contribution to an IRA.