I retired on 1/2/04 from the federal government on an early-out, buy-out. Can I contribute to an IRA in 2004 using the buy-out money? Can I use that money to contribute to future years' IRAs? Can I use the money I received for my annual leave payment for IRAs? Thanks

The cash you use to make the actual deposit to your IRA can come from any source. However, you must be eligible to make that contribution. Eligibility includes receiving eligible (taxable) compensation. See page 8 of IRS publication 590 at http://www.irs.gov/pub/irs-pdf/p590.pdf for a list of eligible compensation.

If the funds you received in 2004 look like a final paycheck with the usual witholding, then the answer is yes. I think you are saying that since you worked in 2004 that you received a final paycheck that included accumulated leave. I believe you would have no problem claiming these dollars as ongoing earned income. I can't answer about lump settlements.

I know that some government employees get paychecks in early January that encompass both hours in the new year and hours in the last few days of December. That throws some compensation into the following year.