Are you recently or long divorced and receiving alimony? Is alimony your only income source? Are you worried that you won’t be able to contribute to an IRA and save for retirement because you don’t have any “qualifying income”?

If you’ve looked into the rules for IRAs at all you’ve probably run into that line about “qualifying income”. In short, the IRS states that in order to contribute to an IRA or Roth IRA you must receive qualifying income.

Most people stop there. They mistakenly believe that qualifying income is only income that you earn from working at a job or by running a business. The truth is that the definition of qualifying income is broader than you’d think and it does, in fact, include alimony.

So what counts as qualifying income?

Let’s look at this broadly for a second and take a minute to really understand what counts as qualifying income. In a nutshell, qualifying income falls under three categories.

    • What you earn as an employee: This one is pretty straightforward. Wages, tips, salaries, commissions, and bonuses from the year in which you want to make an IRA contribution are all considered as qualifying income.

 

    • Self-employment income: There are a lot of different ways you can earn self-employment income. You can do work as an independent contractor. Consultants and technicians are often independent contractors. Or you can have your own practice like a lawyer or accountant. And of course you can be a sole proprietor business owner. Lastly you can be a member of a partnership or LLC.

 

    • Alimony: To bring us back to where we started, yes you guessed it, any alimony you pay taxes on does count as qualifying income. This makes a certain sense when you consider that alimony is tax deductible to the person paying it and taxable as income to the person receiving it.

 

So what doesn’t count as qualifying income?

You might be wondering what doesn’t count as qualifying income.

    • Investment income

 

    • Pension or annuity income

 

    • Any compensation that was deferred from a previous year

 

    • Any income that isn’t taxable

 

There’s always a but:

Even if you bring in qualifying income through alimony or other sources, there are still some caveats about contributing to IRAs you should keep in mind.

    • After age 70 ½ you can’t contribute to a regular IRA, though you can contribute to a Roth IRA

 

    • If you participate in some kind of employer retirement plan and your income is over a certain amount, your tax deduction for saving into a regular IRA may be reduced

 

    • If your qualifying income exceeds a certain amount, you might be limited by how much you can contribute to a Roth IRA.

 

What does this mean to me?

If you are receiving alimony it might be worth it to ask your financial advisor if you should be saving into an IRA or Roth IRA if you aren’t already. Keep in mind limits due to income and age, and know that these types of accounts come with some attractive features that might just help make your later years more comfortable.

 

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. NPC does not render legal advice.