Earned Income for Purposes of Traditional IRA Deduction

Traditional Individual Retirement Accounts help you save income for retirement by giving you a tax break on your contributions. However, a fundamental rule of IRAs is that you must earn the income you contribute.

Earned Income Types

According to IRS Publication 590, earned income includes wages from a job, commissions, tips, self-employment income, military combat pay, military differential pay and alimony.

Significance

The IRS sets annual contribution limits that cap the total amount you may contribute to your IRAs in a given year. As of 2010, the limit for those under 50 is $5,000 and $6,000 for people 50 and older. If you earn less than your limit, your total IRA contributions cannot exceed your modified adjusted gross income (MAGI).

Considerations

Anyone not yet 70 1/2 may contribute to a traditional IRA, but other factors may prevent you from taking a deduction. Participating in an employer-backed retirement plan may impose income limits that lessen your deduction or phase it out entirely.

Exception

The earned income rule does not apply to spouses who file jointly with their partners, provided that the married couple's combined MAGI exceeds their total IRA contributions for the year. Non-earning spouses may contribute to traditional IRAs and deduct the expense if they qualify.

References

• IRS Publication 590: How Much Can You Deduct?
• IRS Publication 590: Who Can Set Up a Traditional IRA?
• IRS Publication 590: General Limit