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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19224  
Subject: IRA & SEVERENCE PAY Date: 1/27/2002 10:36 AM
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If a person is receiving severence pay paid out in 2002 but not otherwise gainfully employed, are that person & that person's spouse who is not employed eligible to make a 2002 IRA contributions?
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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7720 of 19224
Subject: Re: IRA & SEVERENCE PAY Date: 1/27/2002 11:02 AM
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If a person is receiving severence pay paid out in 2002 but not otherwise gainfully employed, are that person & that person's spouse who is not employed eligible to make a 2002 IRA contributions?

IRA contributions must be related to earned income which is usualy report to the goverment on a W2. Since you do not have earned income in 2002 the first answer would be no you can not contribute. But my guess is that your employer will report the severence payments as earned in 2002 on your w2. If they do, I think you can take the deduction.

Your company can tell you now how they will report the payments now.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7721 of 19224
Subject: Re: IRA & SEVERENCE PAY Date: 1/27/2002 11:03 AM
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Mawhinney asks:

If a person is receiving severence pay paid out in 2002 but not otherwise gainfully employed, are that person & that person's spouse who is not employed eligible to make a 2002 IRA contributions?

The answer to that is "yes" provided your old company doesn't call that payment deferred compensation. You will have to check on that to be sure. Severance pay is taxable income, and it will be reported as such in Box 1 of your W2 for the year. Income properly reported in Box 1 justifies an IRA contribution for the person receiving it as well as that person's nonemployed spouse. See IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7722 of 19224
Subject: Re: IRA & SEVERENCE PAY Date: 1/27/2002 6:57 PM
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<Severance pay is taxable income, and it will be reported as such in Box 1 of your W2 for the year.>


I hope I am not nitpicking here. I generally agree with your statement. However, I know people (former Lucent employees) who had their severence paid through their pension plan. It places the laid off employee in the situation of keeping the funds in the retirement plan, rolling it over to an IRA or taking it as a retirement distribution with the added 10% penalty. If one has been a practicing FOOL and has enough in their emergency fund it can work out to your advantage. If one really needs the funds, it is somewhat onerous.

It seems to be a bit of creative accounting that we have come to see so much of lately. What it does is allow the expense to be charged to the pension plan rather than appear as a current expense to the company. I do not think it is a common practice, but how common it is matters little when it happens to you.


BRG

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