Monthly Severance and IRA contribution

[JW888]

I have a severance package that is being paid out over 26 paid period. Can I contribute the maximum allowed in 2024 to my IRA? I believe this is $7000?

[dmertz]

The IRS deems the wage shown in box 1 of your W-2, minus any amount in box 11, as being compensation that will support an IRA contribution.

[JW888]

Thanks. Does this mean I can contribute up to $7K in 2024 tax deductible or can I contribute to the maximum allowed for 401K of $23K tax deductible?

[JW888]

@dmertz  Sorry, I am repeating here as I am not sure if I replied to myself or you!

Thanks again:

What can I contribute exactly:  $7K or $23K to my IRA with my severance pay over a 26 pay period?

[dmertz · Accepted solution]

As far as I know, you are not permitted to defer severance pay to a 401(k).

I assume that you are asking about making a 2024 IRA contribution since presumably you would have received enough regular compensation in 2023 to support a 2023 IRA contribution.  If you are age 50 or over in 2024 and your 2024 Form W-2 shows at least $7,500 in box 1, you can contribute $7,500 to a traditional IRA for 2024.  Depending on your modified AGI for the purpose, you might be eligible to contribute to a Roth IRA instead.  Whether a traditional IRA contribution will be deductible will depend on your modified AGI for the purpose and whether you are covered by a workplace retirement plan for the year of the contribution.  Even if you left the employer before 2024, you might still be covered for 2024 depending on whether the plan uses a fiscal tax year or a calendar tax year.