Roth Contribution from ESPP ordinary income after ER?

[RunningBum]

Starting in 2012 I will have no wage income. However, I still have some ESPP shares, and the 15% discount is taxed as ordinary income when I sell the shares. Does that income qualify for making a Roth IRA contribution up to an equal amount?

For example, say I bought 100 shares in company X through ESPP. It was $100 at the time, and I got it for $85 with the discount. 3 years later I sell it for $110.

100 * $(100-85) = $1500 ordinary income
100 * $(110-100) = $1000 LTCG

Can I contribute $1500 that year to my Roth IRA?

To be clear, I'm talking only about contributing, not converting an existing IRA.

 

[bl1289]

Hello

Did you ever find an answer to this question?

I am having the same thought, and I am wondering if it works this way?

Thank you

 

[RunningBum]

I asked on the Fairmark forum too and got a practical but not definitive answer. If you get a W-2, it would not be a problem, but often the ex-employer is out of the picture and the brokerage firm that controls the shares just sends a 1099-B. The statement (not advice) made is that many people just report the transaction as a simple stock sale (cap gains or loss) and with no earned income, you can't make a Roth contribution. If you do separate and report the earned income, you should be able to do it.

Fairmark Forum :: Retirement Savings and Benefits :: Roth Contribution using ESPP sale ordinary income to qualify

 

[kaneohe]

an interesting question and I don't know the answer either.

I had a similar situation when I retired and started SS. There is this rule that if you earn too much after you start SS (before full retirement age), then SS will penalize you by reducing payments. I had a non-qualified stock option whose proceeds would appear on a W2 whenver it was exercised. I was concerned about the SS reduction but they told me to inform them that it was from a stock option that was awarded in a prior yr and there would be no penalty. I think they envision sweat-of-the brow labor in a current yr as responsible for that penalty and I would guess the same for qualifying you for an IRA. Perhaps you might get away with it if on W2 but I bet if you told them what actually had happened, you might get a different answer.

 

[bl1289]

My CPA told me not to try it

I met with my CPA a couple of weeks back and she told me not to do this. She said my employer would not generate a W-2 for the ESPP income, and trying to contribute to an IRA without W-2 earned income for that year would be asking for trouble.

 

[bl1289]

Update - I discovered that the law changed a few years back. I had not tried to sell ESPP shares since before the turn of the century. A couple of years ago the law changed so that any sale of ESPP shares no matter how long after grant and no matter if you are separated from the employer still generates a W-2.

In fact even transferring the shares from the designated custodian to a different broker will trigger a W-2 for the bargain element.

This has a good side and a bad side. The good side is that it does allow contributing the bargain element income to an IRA. I plan to sell my ESPP shares slowly over a period of years so as not to exceed the annual IRA contribution limit.