Does non qualified deferred compensation distribution/payout count toward traditional IRA contribution eligibility?

[kvural]

I get monthly checks from the company I retired from.  They are called non-qualified benefits disbursement - maybe it is deferred compensation payout.  They send me two 2023 W2's for it. I enter these and there is about $40k that shows up as earned income in Turbotax Deluxe desktop 2023.  The Turbotax says I am ineligible for IRA contribution because my earned income is zero - even though there is a $40k value in the earned income line.  It asks me my total traditional IRA amount (??) and then says I have to pay penalty - I cannot get past this step. Is this because it sees my non-qualified disbursement as non-applicable to earned income requirements for IRA contribution?  I also have dividend, soc sec and 1099R income which I know does not count towards IRA eligibility earned income.

[dmertz · Accepted solution]

Income from a nonqualified deferred compensation plan will not support an IRA contribution.  The IRS states that income on a W-2 that will support an IRA contribution is the amount in box 1 minus the amount in box 11.

[kvural]

Thank you, I agree.

[bigmac2]

The rationale and completion of forms (discussed above) is precisely the manner in which TurboTax handled my 2022 and 2023 filing. Any contribution to an IRA was limited by amount of earned income (other than that from non-qualified plan) on line 1 of 1040. However, for 2024, with identical payments and identical EOY W-2 from non-qualified plan TurboTax shows the amount from box 1of W-2 in line 1 of 1040, nothing in Schedule 1, Line 8t and therefore does not have the same limit on IRA contribution. Has there been a change in IRS interpretation and handling of deferred comp paid under non-qualified plan or mistake in Turbotax 2024? Note I have entered both Line 1 and Line 11 in W-2 input form.

[dmertz]

Nothing has changed.  TurboTax continues to treat income from a nonqualified deferred compensation plan present on Schedule 1 line 8t as income that does not support an IRA contribution.

If TurboTax is allowing you enter an IRA contribution without treating it as an excess contribution, TurboTax must be seeing some source of compensation that does support the contribution.  If so, if you are married filing jointly, that source could be your spouse's compensation.

[bigmac2]

Thanks for fast reply. Bottom-line: my error and no change from prior year handling. 

When entering W-2 worksheet on TurboTax there are two lines for Box 11. My entry was shown only on the top line with the amount matching Box 11 of W-2. It appears entering the Box 11 amount on the lower line is critical - I had assumed this would have been a duplicate entry but not so - it triggers precisely the entries and calculations you cited in prior emails. I also went back to Easy Step and while not detected as an error in the final review, I had an error in answering what I thought was a redundant question about being a distribution from Non qualified plan.

[dmertz]

Box 11 has two purposes.  One is for reporting the amount of distributions made from the nonqualified plan, which is probably the most common use, and is an amount that is includible in income.  The other is for reporting vesting of amount previously deferred and employer contributions previously made that are now vesting, making them subject to Social Security and Medicare taxes, an amount that is not includible in income.  This is why TurboTax requires distinguishing between the two.

[stevensimon]

I have deferred compensation from my prior employment.   On my W-2 I have income and the same amount shown in box 11.    This is identical both in my 2023 and 2024 tax returns.    However in 2023, I do not see an entry in schedule 1 8T and in 2024, I do see an entry.   In 2023, Turbo tax allowed my IRA deduction and in 2024, it does not.    As I looked online, I found deferred compensation is treated as earned income.    Since there is some confusion here, I wonder if you can point me to the wording you are referencing in an IRS document.

[dmertz]

"In 2023, Turbo tax allowed my IRA deduction and in 2024"

This suggests that you entered the W-2 incorrectly when preparing your 2023 tax return.  Amounts shown in box 11 have never been permitted to be treated as compensation that will support an IRA contribution.

[stevensimon]

Found the information in IRS publication p590a: "Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. 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)."     Looks like Turbotax made an error on my 2023 taxes.

[stevensimon]

No I checked and box 11 was filled in correctly.

[dmertz]

If you mistakenly indicated to TurboTax that the amount in box 11 was not a distribution, (i.e., the amount in box 11 indicated an amount previously deferred that became vested during the year and therefore was being reported in box 11 because it was now subject to Social Security and Medicare taxes and was therefore not included in box 1, TurboTax would not have subtracted it form the box 1 amount when determining the amount of compensation that was eligible to support an IRA contribution.  This would be a mistaken entry if the amount in box 11 was actually a distribution.