Can I Contribute to An IRA If I Get Alimony?
If you are recently divorced, it is important that you begin replenishing your nest egg, particularly if you signed away your share of a partner's pension or 401k. You can contribute amounts you receive as alimony to a Roth or traditional individual retirement account (IRA) in addition to income you earned from a job.
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Function
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Internal Revenue Service rules stipulate that IRA owners can only contribute what the agency deems "compensation" -- usually, employment income of some kind. Because IRAs are essentially tax shelters for investment assets, the federal government does not want people using them avoid paying taxes on pension or investment income, income from rental properties or inherited assets. However, the agency specifically lists alimony as an acceptable source from which to fund an IRA.
History
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The federal government has consistently allowed low- or non-earning spouses to contribute to IRAs at the same rates as their bread-winning partners. A law passed in 1981 allowed non-earning spouses to contribute up to $250 to an IRA. A 1996 law increased the spousal contribution to $2,000, which, at the time, equaled the ordinary limit. Spousal IRA contribution limits have matched ordinary limits ever since. Allowing alimony contributions extends the principle of spousal contributions to divorced partners.
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Significance
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Each year, the IRS determines the maximum amount a person may contribute to an IRA. As of 2010, the contribution limit is $5,000 for those under 50; the catch-up limit for those 60 and older is $6,000. This limit assumes that your annual compensation income exceeds these amounts. If it does not, your total Roth and traditional IRA contributions cannot exceed your compensation income.
For instance, imagine you are 45 and, in 2010, received $40,000 in income from rental properties and other investments. You received $3,000 in alimony payments. In 2010, your total IRA contributions cannot exceed $3,000 even though the IRS allows people under 50 to contribute up to $5,000.
Considerations
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In addition to alimony, the IRS allows you to contribute salary, wages, tips or commissions you earn from a job, in addition to military differential pay, nontaxable combat pay and self-employment income. You may add alimony to amounts you receive from these sources when determining how much you can contribute to an IRA. If your compensation income exceeds money you earned from the above sources, the IRS's maximum contribution cap applies.
Warning
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In addition to contribution limits, the IRS also sets annual income limits that phase high earners out of making a Roth IRA contribution or taking a deduction for a traditional IRA contribution. If you lived with your spouse at any point during the tax year but are not yet divorced, you are subject to an extremely low income limit -- as of 2010, it's $10,000. The IRS has this rule to prevent spouses from filing separately in order to skirt its income limits for joint filers. If you are in the process of divorce and have lived apart from your spouse for at least an entire year, you are subject to the same income limits as single filers.
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