Can a 409A distribution be used to qualify for contributing to an IRA?

[U030212]

As I’m putting the finishing touches on my taxes, I came upon a topic that hasn’t been on my radar for quite a few years (ie, contribution to a traditional IRA [tIRA]). I had been fortunate enough to make an income that pushed me over the limit for tIRA contributions. However, in 2022 I went from quiet quitting to loud quitting (aka retired). As a result, my 2023 income came from a non qualified deferred compensation (NQDC) plan - a 409A to be specific - as well as interest and dividends from our brokerage account. I understand that interest and dividends do not qualify as income for purposes of contributing to a tIRA. However, I’m having trouble deciphering whether 409A distributions may be considered as income qualifying for a tIRA contribution.

IRS publication topic no. 451 indicates that “Compensation for purposes of contributing to an IRA doesn’t including earnings and profits from property….or any amount received as pension or annuity income, or as deferred compensation.” At first blush that seems pretty straightforward - deferred comp can’t be considered as compensation for contribution to an IRA. But, when I dig a little further, I can’t tell if the IRS is referring to the compensation as the year of initial deferral to the NQDC plan or the year of distribution from the plan.

Through further searching, I found information on the handling of NQDC distributions on the W2 that shed some additional light. In particular, I was led to expect that NQDC distribution amounts would show up in both Box 1 and Box 11 of the W2. And, if this were the case, I had the impression that the distribution could not be considered as compensation for purposes of a tIRA contribution. Well, sure enough, I see my deferred comp in Box 1. However, no amount is shown in Box 11. Instead, Box 11 simples says “Nonqualified plans”. So, I’m left wondering whether my 409A distributions may be considered income for tIRA contributions.

Has anyone run into a situation such as mine? If so, and if you otherwise qualified for tIRA contribution, did you make such a contribution? Run into any problems down the line?

Thanks for your time

[DavidD66]

Since the 409-A distribution was reported in Box 1 of your W-2 it is treated as earned income for purposes of income tax.  Was the 409-A distribution subject to Social Security and Medicare tax? If so, I would say you can use that income for an IRA contribution.  If not, I would be hesitant to do so.   

[U030212]

Hi DavidD66,

Thanks so much for your response. Very clear. My recollection is that the original 409A contributions had Social Security and Medicare taxes taken out “up front”. But,

I’ll check to be sure (as well as checking on the taxation of the distribution).

Thanks again.