What is Earned Income for IRA?

Earned income for IRA purposes is compensation from working. It can be a combination of income from a variety of sources, such as salaries and bonuses. Deferred compensation, or payments postponed from a prior year, is not considered earned income.

Wages and Salaries

The IRS considers your earnings from wages, salaries and tips listed in Box 1 of your W-2 as income for IRA purposes.

Commissions

For salespersons and independent contractors, income from commissions as a percentage of sales or profits is considered compensation.

Self-Employment Income

Net income from self-employment in a business or trade is also income according to the IRS. This income must be reduced by contributions to other retirement plans and by the deduction for one-half of self-employment taxes.

Alimony

For IRA purposes, taxable alimony or separate maintenance compensation is income.

Military Pay

Non-taxable combat pay and payments from employers to employees who are called to active military duty for more than 30 days, known as differential pay, are both considered compensation for IRA purposes.

References

• Internal Revenue Service: Publication 590: Individual Retirement Arrangements