Qualifying Income for IRA Contributions

You can’t make a regular (non-rollover) contribution to a traditional IRA or a Roth IRA unless you or your spouse have qualifying income. This page explains what types of income count as qualifying income for this purpose.

Reminder: Your IRA contribution or deduction may be limited by other rules:

• In a regular IRA, your deduction is reduced if you participate in an employer retirement plan and your income exceeds certain limits, although your contribution is not reduced.
• In a Roth IRA, your contribution is reduced if your income exceeds certain limits.

This page is only about the rules defining qualifying income. The other rules mentioned above are explained on other pages.

Overview

For each year you contribute to a regular IRA or a Roth IRA, you (or your spouse, if you file jointly) must have qualifying income. If you don’t have qualifying income, you can’t contribute. And if your qualifying income (together with qualifying income of your spouse that can be used to support your contribution) is less than the maximum contribution, then the amount you can contribute is reduced.

There are three categories of qualifying income:

• Amounts earned as an employee,
• Self-employment income, and
• Taxable alimony income from a divorce or separation agreement entered into before 2019.

Amounts earned as an employee

If you work as an employee, compensation income generally includes your wages, salaries, tips, bonuses, commissions and similar amounts. See below for items not included and a safe harbor.

SECURE Act. Beginning in 2020, taxable stipends and non-tuition fellowships received by graduate and postdoctoral students are treated as compensation income for this purpose. In addition, “difficulty of care” payments received by certain home healthcare workers can be treated as compensation income, effective for IRA contributions made after December 20, 2019, the date a law known as the SECURE Act was enacted.

Self-employment income

Qualifying income also includes the types of income that are subject to self-employment tax. (It includes these types of income even if you don’t pay self-employment tax because of your religious beliefs.) You may earn self-employment income in various ways:

• You can be an independent contractor who provides services (for example, as a consultant or a technician) without becoming an employee. This category would include many who work as drivers or other service providers in the “gig economy.”
• You can be a professional (such as a dentist or an accountant) with your own practice.
• You can have your own business (not in a corporation) — in other words, you can be a sole proprietor. If you’re a sole proprietor, you report your business income and deductions on Schedule C of Form 1040.
• You can be a member of a partnership or limited liability company (“LLC”) that carries on a trade or business. In this case, the partnership or LLC should provide you with a Schedule K-1 each year telling you how much income to report, and how much of that income (if any) is self-employment income.

Active involvement

In any of these cases your income is self-employment income only if your services are “a material income-producing factor.” To translate that into plain English, you don’t have self-employment income if you’re merely an investor. You need to be actively involved in the business that produces the income.

No investment income

Even if you’re actively involved in a business, you can’t include investment income in your qualifying income. For example, if you’re a member of a business partnership that maintains some investments on the side, the income produced by the investments isn’t qualifying income. If your partnership doesn’t have a business other than investing, none of the income is compensation income, even if you’re actively involved.

Net earnings from self-employment

When figuring how much qualifying income you have to support your IRA contribution, it’s your net earnings from self-employment that count. Subtract your expenses and other deductions connected with the activity that produced the income. Also, reduce your self-employment income by the amount you contribute to a retirement plan connected with your self-employment (such as a Keogh plan), and by the deduction for one-half of the self-employment tax.

Loss from self-employment

If you have a loss from self-employment, do not subtract the loss from any earnings you have as an employee when determining how much qualifying income you have. For example, if you work part of the year as an employee making $6,000, then spend the rest of the year being self-employed with a loss of $5,400, your qualifying income is still $6,000.

S corporations

If you own stock in an S corporation, you’ll receive a Schedule K-1 similar to the one you would receive as a member of a partnership. But income you receive as a shareholder of an S corporation is not qualifying income. If you are also an employee of the S corporation, your qualifying income includes amounts earned as an employee, as explained earlier.

Alimony income

For purposes of making an IRA contribution, alimony you receive can be treated as qualifying income, but only if it is taxable. If you don’t pay tax on your alimony, you can’t treat it as qualifying income. Similarly, child support doesn’t count as qualifying income because it isn’t taxable.

What alimony is taxable? Your alimony is taxable if the settlement or decree requiring those payments was entered into before 2019, and hasn’t been modified to make those payments nontaxable.

Items not included

The following items may not be included in your compensation income:

• Investment income such as dividends and interest
• Pension or annuity income
• Compensation that was deferred from a previous year
• Any form of income that’s not taxable (such as foreign earned income and housing allowance that are excluded from income)

There are exceptions to the rule that the income has to be taxable. Nontaxable combat pay is qualifying income for this purpose, as are certain nontaxable “difficulty of care” payments made to home healthcare workers.

Safe harbor

The IRS recognizes that it’s unclear whether some items are “compensation income.” To make things easy, the IRS says you can generally treat any item as compensation income if it’s included in the box of Form W-2 labeled “Wages, tips, other compensation.” There’s one exception: any portion of “Wages, tips, other compensation” that’s also reflected in the box labeled “Nonqualified plans” doesn’t count as “compensation income” for this purpose.