Eligible compensation for making an IRA contribution

Submitted by Kevin O'Hearn on Thu, 2019-11-14 21:40

Hello

The IRA Help link below discusses eligible compensation for making an IRA contribution. The grid indicates that severance pay is not eligible compensation for making an IRA contribution. I have found other information that contradicts this. Per the IRS Publication 590…… “The IRS treats as compensation as any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in
box 11 (Nonqualified plans).”

Generally severance pay is reported as wages on the W-2 so I don’t see why it would not qualify to make an IRA contribution. Can you provide some guidance? Is it correct to say that severance pay reported on a W-2 in box 1 would in fact qualify for making an IRA contribution?

Thanks!!

https://irahelp.com/slottreport/you-must-have-earned-income-contribute-ira



Submitted by William Tuttle on Fri, 2019-11-15 00:04

  • Publication 590-A is “Contributions to Individual Retirement Arrangements (IRAs)”
  • What is considered compensation for IRA contribution purposes has no bearing on what is considered 401k plan compensation.
  • Under 415(c)(3) severance is not considered 401k plan compensation.

Submitted by Alan - IRA critic on Fri, 2019-11-15 00:47

As for the Slott Report link which indicates that severance pay is not taxable compensation for IRA contribution purposes, you are correct. That Slott report article was incorrect and severance pay should not be shown in the second column. Severance pay is typically taxable and included in Box 2 of the W-2. and not in Box 11. 

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