Does income from exercised non statutory stock options reported on W2 count as earned income so I can contribute to my IRA? I'm retired & not contributing to a 401K plan.

[ldole1256]

My goal is to reduce taxes for 2015 by making a deductible IRA contribution. I don't have a job in retirement so the question is really whether the option income counts as "earned" allowing me to make the contribution and take the deduction.  

[dmertz · Accepted solution]

The amount on your W-2 that is considered eligible compensation for making an IRA contribution is the amount in box 1 minus the amount in box 11.  I suspect that you box 11 has the same amount as is in box 1, so none of this income would be eligible compensation.

[dkowalski]

What if line 11 is blank, but line 12 has an amount equal to line 1. with a V code?

[dmertz]

According to IRS Pub 590-A, since no amount is shown in box 11, the amount in box 1 is considered eligible compensation for making an IRA contribution.

[danwilcox77]

I don’t see this in Pub 590-A.  Can you give me a page reference?  

[SteamTrain]

Page 6, left column...top of page under "Wages, Salaries, Etc."

https://www.irs.gov/pub/irs-pdf/p590a.pdf

[danwilcox77]

I just received a tax due notice from the IRS for this exact situation.  I’m retired and received a W2 from former employer. Box 1 shows 1) voluntary deferred compensation under 509 plan that was paid in the current year (also reported in box 11) and 2) proceeds from stock options vested in the current year (also reported in box 12a code V) and 3) proceeds from a bonus I was eligible for that was subject to two year delay and amount is based how the company stock performed.  The latter 2 items I was never taxed previously for SS and Medicare so they are included in my box 3 & 5 earnings.  

My interpretation of the various literature is that I could make a IRA contribution based on the earnings (box 1 less box 11) that were not previously available to me until the year in which they were paid and reported in the W2 which is after my retirement date.   I’ll post the outcome.

[dmertz]

Perhaps the IRS is disputing the correctness of the reporting on the W-2.  Pub 590-A says, "The IRS treats as compensation 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)."

TurboTax does its calculations based on the numbers in box 1 and box 11 and has no way to determine if those numbers are correct.  TurboTax's behavior also depends on the user's response to the follow-up question to a box 11 entry asking if the amount in box 11 is from a nongovernmental 457(b) plan or a nonqualified deferred compensation plan.  If you answer No, TurboTax will not reduce the amount in box 1 by the amount in box 11 when determining available compensation for making an IRA contribution.  (I'm not sure why TurboTax asks this question unless it's common for amounts that are not from a nongovernmental 457(b) plan or a nonqualified deferred compensation plan to be improperly included in box 11.)

[npcomplete]

Looking at my W2, Box 12d Code V is defined to be "income from exercise of nonstatutory stock options." Your statement of earned income sounds correct but it probably needs to Box 1 - Box 12d

[npcomplete]

Sorry folks - please ignore my earlier response. It is indeed Box 1 - Box 11. In other words, very satisfying to know that exercise of stock options is eligible for IRA contributions. That's good for us retirees!

[dbsmith]

I am a recent retiree and I want proceeds from exercise of non-qualified stock options to be eligible for IRA contributions too, and I've been searching for support for this, but I haven't found it yet.  As retirees don't (as I understand) get W-2's, but instead 1099's associated with exercise of such options, I don't see how the Box 1/Box 11 justification is relevant to a retiree.  While I wish it were different, I can't see that proceeds from these transactions are considered earned income, which seems to be requisite for IRA contribution.  

I would love to be corrected.

[fanfare]

retirees certainly do get a W-2, where applicable.

[chuckr1]

I'm retired and was told I would get a W2 from my former company when I exercised my non-qualified options.  That's exactly what happened.  They withheld federal, state, SS, and Medicare taxes from the proceeds.  Box 1 has the total proceeds, nothing in box 11, 12A has code V and same value as Box 1.

I am planning an IRA contribution as it also helps reduce adjusted gross income relative to stimulus money.  I'm curious what sort of 1099 you get.  Also it makes sense to me that it is considered earned income as it was part of our compensation while working.

[MaryM428]

Exercising a stock option is not considered earned income.  Exercising a stock option results in a capital loss or gain.

You cannot contribute to an traditional or a Roth IRA if you do not have earned income.  The only exception is a spousal IRA for a non-working spouse.

You'll probably receive a 2020 Form 1099-B from the broker that handled your option purchase and sale.

[dmertz]

IRS Pub 590-A states:

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The IRS treats as compensation 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).

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