Can I use severance pay to qualify to save in an IRA?


Q. I received severance pay from the loss of my job in 2020 and received a W-2. Can that income qualify for an IRA? My only other income is Social Security and interest.
— Investor, I hope

A. You’re in luck.

The IRS classifies severance pay as taxable compensation, said Bill Connington of Connington Wealth Management in Paramus.

It is reported on your W-2 form and your employer must withhold payroll taxes from the severance.

“The IRS requires that you have taxable compensation at least equal to the amount you contribute to an IRA up to the annual limit, which is $6,000 in 2021, plus a $1,000 catch-up provision,” he said. “Since severance pay is compensation, it can be used.”

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This story was originally published on March 30, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.