Is Severance considered employment income for Roth IRA? (2015, separate, salary)

[arwenmark]

I am wondering if the severance checks my husband will receive in Jan. 2016 would be considered earned income for the purpose of contributing to a Roth IRA?

Also can someone confirm that the 5 year withdrawal penalty is only for income/interest on the Roth investments and not the contribution itself.

Thanks

[Ariadne22]

Originally Posted by arwenmark

I am wondering if the severance checks my husband will receive in Jan. 2016 would be considered earned income for the purpose of contributing to a Roth IRA?

Yes, because IRS considers severance earned income.

Earned Income

The IRS stipulates that individual retirement accounts be funded with earned income. This can include wages, salaries, commissions, tips, self-employment income and military pay. Even taxable alimony is considered earned income.

Severance Pay

The IRS classifies severance pay -- money paid to you when you separate from your employer -- as earned income. As further evidence, severance pay is included in Box 1 of Form W-2 -- the box that includes wage and salary income -- which you receive from your employer each January. Consequently, severance can be put in an IRA.

Is Severance Pay Eligible for IRA Contributions? - Budgeting Money

However, watch to which year that severance is attributable - i.e., is it included in the W-2 for 2015, or have they moved it into 2016?

If employer includes the severance as part of 2015 income, then a contribution may be made only for tax year 2015.

If employer pays in January 2016 and reports that as income in January 2016, then you could make a contribution for tax year 2016, as well.

Originally Posted by arwenmark

Also can someone confirm that the 5 year withdrawal penalty is only for income/interest on the Roth investments and not the contribution itself.

This is correct.

[spsmith713]

Originally Posted by arwenmark

I am wondering if the severance checks my husband will receive in Jan. 2016 would be considered earned income for the purpose of contributing to a Roth IRA?

Also can someone confirm that the 5 year withdrawal penalty is only for income/interest on the Roth investments and not the contribution itself.

Thanks

If the amount is going to be substantial it would be beneficial to go to a CPA and let them figure out quarterly estimates for you to pay so you don't get stuck with a huge tax bill when filing.

[arwenmark]

There will be eight checks, with the last two being in January 2016, however I don't know how the company will treat them as to whether they are considered 2016 or since He was let go in 2015 they somehow attribute it to 2015.

[jlawrence01]

Originally Posted by arwenmark

There will be eight checks, with the last two being in January 2016, however I don't know how the company will treat them as to whether they are considered 2016 or since He was let go in 2015 they somehow attribute it to 2015.

If the checks are not issued until 2016, they will appear in your 2016 income.