I left my job in 2018, where I earned $3000 that year. At that point I had $500 in a 401k plan, which was too small to do a rollover to an IRA, so I cashed it out (after 20% tax I received $400, and paid another 10% early withdrawal when I filed). I did not make any other money that year (except for interest and dividends).

Now, I would like to max out my allowed Roth IRA contribution for that year, which is equal to my earned income (since it is below the max contribution limit of $5500). My question is: Is my "earned income" for that year $3000 or $3400 or $3500?


No, 401k withdrawals is not 'earned income'

Your earned income for 2018 is $3000.

Normal contributions to a Roth IRA or Traditional IRA can only occur during that tax year up through the tax filing deadline (April 15) in the following year (2019). If you meant 2019 earned income is $3000, then you have until the new tax deadline of July 15, 2020 due to COVID-19.

Back to what is considered income for IRA or more specifically compensation:

From: https://www.irs.gov/publications/p590a#en_US_2019_publink1000230355

Compensation for Purposes of an IRA

  • wages, salary, etc.
  • commissions
  • self employment income
  • taxable alimony and separate maintenance
  • non-taxable combat pay

What Isn’t Compensation?

  • Earnings and profits from property, such as rental income, interest income, and dividend income.
  • Pension or annuity income.
  • Deferred compensation received (compensation payments postponed from a past year).
  • Income from a partnership for which you don’t provide services that are a material income-producing factor.
  • Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040 or 1040-SR), line 1b.
  • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

Cashing out of a 401k would be in the same category as getting pension money so not earned income.

  • 1
    You link to the rules for 'earned income' for EITC. IRA contributions use 'compensation' which is slightly different -- IRA 'compensation' does include non-TCJA alimony while EITC does not, and for EITC you can choose whether to include Medicaid waiver payments. But both IRA and EITC exclude the 401k distribution in this Q. May 3 '20 at 4:22
  • @dave_thompson_085 You're right. making correction, thanks. May 3 '20 at 4:38
  • Thanks for the answer. I did mean 2018, my actual situation is more complicated: I have already contributed $5500 to my Roth IRA in 2018, but am now realizing that this is more than the maximum I am allowed to contribute (which you're telling me is $3000). So, I'm trying to figure out (1) how much of my contribution is "excess" and therefore gets 6% taxed for last year, and (2) how much I need to withdraw to avoid paying the 6% tax again this year.
    – dkv
    May 3 '20 at 15:00

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