Severance Pay for IRA
Hello,
The question comes up often where a person leaves a company and is receive severance pay after they separate from service and whether that income would qualify as earned income to qualify IRA contributions. There seems to be conflicting info online where some resources say it qualifies and other say it doesn’t.
I would think if the severance is being reported in box 1 of the W2 that IRS would deem it to be earned income, even if paid out after being employed with a company. Does that sound right?
Any scenarios where severance would NOT be considered earned income to qualify retirement contributions?
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2023-02-22 21:07
Severance pay should be reported on a W-2, is taxable, subject to FICA, and is eligible for IRA contributions. Box 1 less Box 11 of any W-2 is a safe harbor for IRA contributions with no exceptions. If severance pay is improperly reported on a 1099 MISC, it should be corrected and filed as wage income on Form 1040. If certain judgements and compensatory damages that are correctly reported on a 1099 MISC are a portion of a settlement that included severance pay, the portion not correctly reported on a W-2 would not be eligible for IRA contributions.