Qualifying income for retirement contributions

[Mel in Hawaii]

I have been reading about the income requirements for retirement contributions and I am a bit uncertain about the following...

After working for my present company for almost 10 years I will be getting let go on December 31. We have a severance benefit of 6 months pay for which we will get paid on our normal pay periods with normal benefits (life insurance, medical, dental, vision, flex spending, that kind of thing) with the exception of the 401k where all contributions to the 401k end on Dec 31. During this time period, we are supposed to available to be called back to work if the employer requires it or else we stop receiving the income/benefits. We also are supposed to lose the benefit if we take another job for a competing company.

Does the severance benefits that we will receive from January to June qualify as earned income even though we are not actively going to work? My personal feeling is that it does because the income will be reported in box 2 of the W-2, it's not a pension or annuity, and it is not deferred income.

(While I say the benefits continue, the actual reality is that some are not due to reasons out of the company's control, so that should answer anyones questions regarding my comments from prior posts not matching the details listed above. I do give the company credit though, they worked hard to find replacement 'benefits' that were comperable in value to what we had before and have compensated us for lost benefits.)

[TAXBILLY]

Earned income.

taxbilly

[OldJack]

Does the severance benefits that we will receive from January to June qualify as earned income even though we are not actively going to work? My personal feeling is that it does because the income will be reported in box 2 of the W-2, it's not a pension or annuity, and it is not deferred income.

It is earned income that qualifies. W2 income has always been taxable and counted as earned income when actually paid and not when work performed.

[kcjenkins]

I agree, this is 'earned income', and it will qualify. In fact, if you think about it, you 'earn' it not just by your past efforts, but by remaining 'available', whether or not they actually do call on you during that period.

[BulldogTom]

Mel,

Since your title was about retirement contributions, are you looking at an IRA contribution for the year? Is the company allowing you to continue to contribute a portion of your pay to the 401K during your "on call" employment period and just not matching your contributions?

My take is you are still employed, so your wages are definately qualifying for either situation above, subject to all the normal rules.

Here is a piece of advice. Take your 401K and roll it into a self directed IRA at the first opportunity. If you are happy with your company's financial provider, keep them, just roll the 401K to the IRA. There is no penalty or taxable transaction for doing this. When I was working for Del Monte, I left my 401K in the Merrill Lynch account because it was doing fine. Then I got a notice that the company changed the fund offerings and I was being "moved to comparable funds" in the Merrill Lynch family. I didn't think much of it, until I got my next quarterly statement and 60% of my money was gone. Like I said, even if you like the company that is offering your investment choices, you should still roll your 401K to an IRA.

Tom

Lodi, CA