Deferred Compensation and Traditional IRA contributions

[Welshie10]

I'm single and became ineligible to participate in my company 401(K) in 2023 due to being considered highly compensated. For those who are ineligible, the company offers a supplemental deferred compensation plan and I did participate in it in 2023 to get the company match. My question is can I make a tax deductible contribution to a traditional IRA for 2023? The supplemental deferred compensation plan is nonqualified and nothing is checked in box 13 of my W-2. TurboTax is suggesting that I can contribute but I want to confirm that's correct. 

[MonikaK1]

It depends. If you meet the income and certain other requirements, you may be able to make a contribution to a traditional IRA  and take a deduction that will reduce your tax. See this IRS webpage for more information. If you qualify, you can make 2023 IRA contributions until April 15, 2024.

You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you participate in another retirement plan at work. 

If you are eligible, you can enter different amounts in TurboTax to test the result before making the contribution. You can preview your return before filing to find out how your taxes were calculated including the calculation of any deduction for IRA contributions and the Saver's Credit. See here for details. 

When you make a contribution to a qualifying retirement account for 2022, you can deduct up to $6,000, or up to $7,000 if you’re age 50 and up, from your taxable income.

Please see this tax tips article for more information about deductible retirement contributions.

[old guy]

In short, I do not believe "deferred compensation" from a non-qualified plan counts as income for purposes of an IRA contribution/deduction.  Turbo Tax sees a W-2 and assumes it is income for IRA purposes, and will prompt you to make an IRA contribution.  It tricked me into making an IRA contribution for stock grants, though I caught the error before I filed (still had to pay a penalty).  I reported this matter to TT, but never got a response.

Following is cut/pasted from IRS website, Tax Topic 451

Contributions

To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. For tax years beginning after 2019, there is no age limit to contribute to a traditional IRA. Compensation for purposes of contributing to an IRA doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation. In certain cases, other amounts may be treated as compensation for purposes of contributing to an IRA, including certain alimony and separate maintenance payments received, certain amounts received to aid in the pursuit of graduate and postdoctoral studies, and certain difficulty of care payments received.

[old guy]

I'm back in case I misunderstood your question.  While deferred comp doesn't count toward an IRA, maybe you have other non-deferred income you want to count toward an IRA.  IRA deductions may be limited if you otherwise were covered by a retirement plan.  If you want to know whether participating in a non-qualified plan counts as being covered by a retirement plan for purposes of the deduction limitation, I don't know the answer.  

With my company, being a highly compensated employee did not throw me out of all aspects of the qualified retirement plan.  It just placed limits on how much the qualified plan could give me.  The non-qualified plan made up the difference.  This is a complex area, and the IRS repeatedly says in its publications that you should check with your employer to verify whether or not you were covered by a retirement plan.

[Welshie10]

Thanks for the information, links and suggestions. I'll follow up on them and with my employer.