Can a VSIP payout be used to contribute to a Roth IRA after retirement?

[Tespy]

I retired (took an early out) from federal service last September 2019 and received a VERA and VSIP. The VSIP is the incentive payout part for those that don't know (basically a form of severance pay).

My VSIP payout is divided into two disbursements, both occurring this year (2020).

My income this year is much lower than last year because I'm on a pension that is approx one fifth of my old salary. So I'm well below the income limit for contributing to a Roth IRA (which can only be contributed to with payroll income, not retirement income).

I recently received my first VSIP payment and they took out all the same taxes they did when I was working (SS deductions etc). So it's taxed as payroll income.

Since VSIP payments are taxed as payroll income, does this mean I can contribute whatever the annual limit is into my Roth IRA from this income? Even though I am now retired and have no payroll income from a job?

I've read vague and conflicting information about this topic online, although finding any information has proven difficult. Some sources seem to say you cannot make contribution to an IRA, others suggest or outright say you can. In my mind, since it is treated as payroll income (and in a way it is a final form of payroll income), then I would think using this income for a Roth contribution would be allowed.

Hopefully one of the experts here will know more about it. I would think it would be a common question amongst recent retirees??

Lastly, I still have my traditional (non-Roth) TSP, but I also have a standalone Roth at Vanguard.

Thanks in advance for any help!

 

[tsptalk]

Welcome Tespy! Thanks for joining us. I'm not a retirement expert but evilanne posted some good info on VSIPs a while back. I hope it helps...

https://www.tsptalk.com/mb/retireme...-considering-72-t-tsp-withdrawal-options.html

 

[Tespy]

Thank you for the kind welcome tsptalk! That thread is excellent and I read through it, very informative. But I did not see any reference to post-retirement VSIP based Roth contributions unless I missed it?). Hopefully evilanne or someone else who actually did it (or tried to) can weigh in.

Thanks again...

 

[evilanne]

Tespy,

Your VSIP is considered earned income and therefore you can contribute maximum amount to Roth based on your age (assuming VSIP is greater than max contribution). You should get a W-2 for the VSIP amount paid by your agency. You will get a 1099-R for your retirement income. I retired early 2016 and made full contribution to Roth. My W-2 included salary and VSIP payment. Also, you have until tax filing date to contribute to your IRA for prior year, i.e. you have until April 15, 2021 to make you contribution for 2020 but you can also make the contribution any time this year.