Fed Gov seperation leave cashout eligible for IRA?

[Guest westbay]

Retiring under FERS from Federal Gov on 2 Jan 2007. Cashing out accumulated leave - about $10,000. Only other compensation for 2007 will be my pensions which are not eligible for IRA contributions. Would the accumulated leave cashout qualify for an IRA? I believe I get a W-2 showing the leave cashout as earned income?!? and taxes are taken out. IRS Pub 590 does not address this. If I took terminal leave starting 2 January, I know it would qualify. But then I wouldn't be drawing any pension while on terminal leave and my total net would be less for the year.

[saabraa]

Yes, the leave payment constitutes earned income for IRA purposes, as does the final regular paycheck. But don't forget the active participant aspect. You'll receive a w-2 for 2007 showing an "X" in box 13 (pension plan), meaning you actively participated in an employer sponsored plan in your 2007 tax year. So, depending upon the amount of your modified adjusted gross income for 2007, your deduction could be reduced or eliminated.