"Earned income" for IRA contributions

[chang]

I know that you can only contribute to an IRA if you have "Earned Income" (i.e., wages). I retired in February 2020, so I am looking ahead to 2021 and wondering if I can make an IRA contribution on 1/1 as I have always done. I won't have a paycheck, but I will continue to receive a LTIP payout from my former company for the next three years. (LTIP is a bonus plan that vests over three years.)

Question: would this be considered "Earned Income" for the purpose of IRA contributions? Hopefully somebody knows .... would be nice if yogibearbull checked in here, he is a wizard at these things!

[Karen]

Here's a link from the IRS website. I hope this helps you.

www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income

Generally, earned income includes taxable employee compensation and net earnings from self-employment, as well as certain disability payments.

There are two ways to get earned income:
You work for someone who pays you

or

You own or run a business or farm

Taxable earned income includes:
Wages, salaries, tips, and other taxable employee compensation;
Union strike benefits;
Disability retirement benefits received prior to minimum retirement age;
Net earnings from self-employment if:
You own or operate a business or a farm or
You are a minister or member of a religious order (see Special Rules page for more information);
You are a statutory employee and have income. (See definition of statutory employee on our Helpful Definitions and Acronyms for the EITC page).
Nontaxable Combat Pay election. You may elect to include your nontaxable combat pay in earned income for purposes of the EITC. The amount of your nontaxable combat pay should be shown on your Form W-2, in box 12, with code Q. Electing to include nontaxable combat pay in earned income may increase or decrease your EITC. See Publication 3, Armed Forces Tax Guide, for more information.

Examples of income that are not earned income:
Pay received for work while an inmate in a penal institution
Interest and dividends
Pensions or annuities

Social security
Unemployment benefits
Alimony
Child support.


Here's more links that may be helpful:

www.wolterskluwer.com/en/expert-insights/compensation-required-to-make-ira-regular-contributions

www.investopedia.com/terms/e/earnedincome.asp

[chang]

Thanks Karen  for the links. The IRS page is silent about bonus payments, but it does say at the outset:

"Wages, salaries, tips, and other taxable employee compensation"

Since the LTIP payouts are "taxable employee compensation" I'm going to assume that I'm eligible to make an IRA contribution.

[Chahta]

I assume you use a tax preparer. They would be the best source to ask. So do you pay US and Thai taxes? What are Thai taxes like?

[Karen]

Chahta

My husband and I saw your avatar. We are James McMurtry fans.

Have you ever heard of him or his song Choctaw Bingo?

www.youtube.com/watch?v=Nggqe-L9ZQ8

[Chahta]

Ha, never heard it but looked it up. I joined the Choctaw Nation of Oklahoma after tracing my ancestry by bloodlines. Must be a local thing having bingo.

[chang]

Well this is confusing. From Karen 's second link:

Internal Revenue Service (IRS) Regulation 1.219-1(c) defines compensation as "wages, salaries, professional fees, or other amounts derived from or received for personal service actually rendered (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and bonuses) and includes earned income from self-employment, as defined in IRC Section 401(c)(2), but does not include amounts derived from or received as earnings or profits from property (including, but not limited to, interest and dividends) or amounts not includable in gross income".

Compensation does not include amounts received as deferred compensation, pension or annuity payments (including IRA distributions and social security benefits), nor does it include amounts excluded from income such as foreign earned income. Compensation also includes taxable ok alimony and separate maintenance payments as well as any nontaxable combat pay...

So what about deferred bonuses? And what exactly does "deferred" mean? Is LTIP vested compensation "deferred"?

[Karen]

Deferred Compensation definition:
www.investopedia.com/terms/d/deferred-compensation.asp

WHAT IS COMPENSATION FOR MAKING AN IRA CONTRIBUTION?
www.irahelp.com/slottreport/what-compensation-making-ira-contribution

[FD1000]

Interesting question but the max IRA contributions is still only $6000 max($7K age higher than 50). After reading several links it looks to me, you can do the IRA.

But, What happens if I go over my IRA contribution limit(link)?

Unless it's a clear-cut answer, I wouldn't bother about $7K 

[chang]

The LTIP will exceed $7000 so I would (if allowed) be able to contribute the maximum amount. I have always made a maximum IRA contribution after 1/1 my entire working life. I see no reason to stop now; I could live for another 40 years!

[frankclovis]

What kind of document do you get to report the income? If it is a W-2, then it would seem that it is compensation. If it is a 1099-R (which you get for traditional pensions and IRA RMDs) then it probably isn't.

[Deleted]

A 401A is a type of LTIP which is a deferred cash bonus plan. I had one which I converted to a Roth IRA after retirement. Whoever is administering your plan should be in a position to provide information about the details and a tax consultant or financial advisor can suggest options. If the income was earned in a prior year and paid in the following year, it would taxed in the following year, but not earned in the following year. Your 2020 W-2 may or may not include a payment.

[chang]

Dec 27, 2020 19:47:58 GMT frankclovis said:

What kind of document do you get to report the income? If it is a W-2, then it would seem that it is compensation. If it is a 1099-R (which you get for traditional pensions and IRA RMDs) then it probably isn't.

I think it shows up on my W-2, I'd have to double check that. Definitely not a 1099-R; I'm talking about a standard company bonus payment that vests over a multiyear period.

[chang]

Dec 27, 2020 21:52:29 GMT @haven said:

A 401A is a type of LTIP which is a deferred cash bonus plan. I had one which I converted to a Roth IRA after retirement. Whoever is administering your plan should be in a position to provide information about the details and a tax consultant or financial advisor can suggest options. If the income was earned in a prior year and paid in the following year, it would taxed in the following year, but not earned in the following year. Your 2020 W-2 may or may not include a payment.

Mine is definitely not IRA-convertible. It shows up as company shares, which I always transfer to my Fidelity account and then promptly sell. It's definitely taxable, because they always do a withholding calculation (e.g., if my LTIP is 100 shares, maybe they withhold 30 and deliver 70 to me).

[Capital]

Dec 28, 2020 0:57:25 GMT chang said:

Dec 27, 2020 21:52:29 GMT @haven said:

A 401A is a type of LTIP which is a deferred cash bonus plan. I had one which I converted to a Roth IRA after retirement. Whoever is administering your plan should be in a position to provide information about the details and a tax consultant or financial advisor can suggest options. If the income was earned in a prior year and paid in the following year, it would taxed in the following year, but not earned in the following year. Your 2020 W-2 may or may not include a payment.

Mine is definitely not IRA-convertible. It shows up as company shares, which I always transfer to my Fidelity account and then promptly sell. It's definitely taxable, because they always do a withholding calculation (e.g., if my LTIP is 100 shares, maybe they withhold 30 and deliver 70 to me).

chang what you are describing seems more like a profit sharing plan.
www.investopedia.com/terms/p/profitsharingplan.asp#:~:text=A%20profit%2Dsharing%20plan%20is,its%20quarterly%20or%20annual%20earnings.

[chang]

Dec 28, 2020 23:43:07 GMT Capital said:

Dec 28, 2020 0:57:25 GMT chang said:

chang what you are describing seems more like a profit sharing plan.
www.investopedia.com/terms/p/profitsharingplan.asp#:~:text=A%20profit%2Dsharing%20plan%20is,its%20quarterly%20or%20annual%20earnings.

Well, yes and no. I had a definite LTIP target as part of my TDC, and part of it was performance related (both my performance and the company performance). It's really just a bonus, like the STIP, except vesting over 3-4 years it serves as a retention tool. If I had quit, I would have lost all unvested amounts, but as they let me go, I retained everything.

[JR.FA]

I believe it is not considered earned income in this case. I was talking to HR on a similar matter and they said they couldn't take part of these to continue 401k contributions for the similar reason. Just open a consulting firm and show some income for 2021.

[chang]

Here is the answer from my tax preparer:

"Yes! You can make IRA contributions with your LTIP/payout in 2021, however to contribute to Roth IRA your modified adjusted gross income on your returns must be under $206,000 for the tax year 2020 and 208,000 for the tax year 2021."

So I can contribute to my T-IRA (I was over the Roth limit in 2020).