> To me that sounds like my K-1 income that I
> receive as a shareholder is NOT qualifying income
> for Roth income limits. Am I missing something?
You're not really missing anything. But you are getting the tests mixed up.
Under current law, your K-1 is not earned income. If all you had is your K-1 (Sub S) income, you could not contribute to an IRA because your earned income is zero. This is what Kaye was saying in the article to which you refer.
I use the term "earned income" because, to me, it is easier to understand in most situations. Kaye uses the term "qualifying income" because it is broader. For example, taxable alimony is not really "earned income," but Congress has said that it is just like earned income when it comes to contributing to an IRA. Therefore, qualifying income includes taxable alimony. There's a little more to it than that, but that takes care of the basics.
In short, you have to have qualifying (to use Kaye's term) income to contribute to an IRA. The wages shown on your W-2 are qualifying income for this purpose; your K-1 income is not.
That's the first test: Your contribution is limited to the amount of qualifying (or earned) income you have. (Actually, it's limited to the lesser of $5000 (if you are under age 50) or the amount of qualifying income.)
Next there is the second test. Your allowable IRA contribution is limited or eliminated if your "modified adjusted gross income" is within or above the phase out range for your filing status. For a single individual, a full Roth contribution is allowed for 2008 if your MAGI is 101,000 or less, a partial (i.e., less than $5000) contribution is allowed if your MAGI is between $101,000 and $116,000; and no Roth contribution above $116,000.
Your MAGI includes both your wages and your K-1 income
(plus any other income you have like interst, capital gains, gambling winnings, etc.). The term qualifying income is not used at all in talking about the second test.
It is used in discussing the first test only. Your K-1 income is fully included in your MAGI.
BTW, adjusted gross income (AGI) is the bottom amount on page 1 of your 1040. As mentioned, MAGI is the AGI with various modifications. K-1 income is not
one of those modifications.
For more information, you may want to look at page 60 in IRS Pub 590.
Also, Kay talks about MAGI (for the second test) here: