Print This Page

Subject:   Is an nqso valid source of income for an IRA contribution?
Date:   Sat, 06 Nov 1999
From:   Henry

Dear Michael

I have been retired for 3 years and have no earned income. This year I exercised a non-qualified stock option, for which I paid Federal and State Income Tax, as well as Social Security and Medicare taxes. Can I use this nqso income as a justification for using some of the proceeds to make a contribution to my IRA account?

Thank you very much for your help.

Henry

Answer

Hello Henry,

In Private Letter Ruling 8304088, the Internal Revenue Service took the position that the income reported from the exercise of a non-qualified option is deferred compensation. According to Internal Revenue Code Section 219(f)(1), deferred compensation does not qualify for an IRA deduction. Since I haven't found any other guidance, I would rely on the ruling and say no, you shouldn't make an IRA contribution based on the additional compensation from exercising a non-qualified option.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.