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BAC /quotes/zigman/190927/composite 16.36 -0.08 -0.49%
C /quotes/zigman/5065548/composite 53.28 -0.16 -0.30%
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T /quotes/zigman/398198/composite 33.29 -0.15 -0.45%
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Rates »

5 yr CD
1.5%
2 yr CD
0.8%
1 yr CD
0.6%
MMA $10K+
0.3%
MMA $50K+
0.4%

National averages from Bankrate.com

You Don’t Need Another Credit Card, You Need A Better One.
Avg. APR Last Week 6 Months
Low Interest 11.62% 11.62% 11.53%
Business 12.85% 12.85% 12.85%
Student 13.14% 13.14% 13.14%
Balance Transfer 14.12% 14.12% 14.00%
Airline 15.10% 15.10% 15.15%
Reward 15.14% 15.14% 14.99%
Cash Back 15.27% 15.27% 15.26%
Instant Approval 18.00% 18.00% 17.93%
Bad Credit 22.73% 22.73% 22.48%
Source:CreditCards.com

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Encore
A blog about living in and planning for retirement

IRA Compensation: Trickier Than You’d Think

What counts as “compensation” that you can contribute to an IRA?

iStockPhoto

The answer is trickier than you might think, especially if you’re semi-retired or unemployed.

The Tax Court recently ruled that a 68-year-old taxpayer did not qualify as a professional investor/trader, as he claimed on his 2005 tax return, when he contributed $4,500 in dividends and interest income to his individual retirement account, according to a March 17 memorandum in the case of Robert Kobell v. Commissioner of Internal Revenue.

Dividends and interest are only considered compensation if the taxpayer is a dealer. Although the taxpayer had worked in New York early in his career as a trader, he had made only three stock transactions in 2005, did not have customers and did not operate “from an established place of business,” the memo says.

The Tax Court concluded that the $4,500 was not considered compensation, which meant it could not be deducted as an IRA contribution.

Ed Slott, an IRA consultant in Rockville Centre, N.Y., points out that the Tax Court ruled on whether the IRA contribution was deductible, because this was what the Internal Revenue Service had challenged. But the taxpayer wasn’t eligible to make an IRA contribution at all, regardless of whether he deducted it, because he didn’t have compensation.

This points up an important, and potentially costly, lesson for taxpayers in transition: When you make an IRA contribution but have no compensation, or less compensation than your total IRA and Roth IRA contributions, it’s considered an “excess contribution.” Excess contributions are subject to a 6% excise tax for each year they remain in the IRA.

So, what does count as compensation? For most people, it’s pretty simple: Earned income, mainly your paycheck.

But other times it isn’t so easy to determine. You might be getting your retirement income from an annuity or pension – but that doesn’t count as compensation. Alimony and maintenance payments do count – but not child support.

Unemployment income – despite being referred to as “unemployment compensation” in an IRS publication, doesn’t count as compensation for IRA purposes, Mr. Slott says.

To keep track of what counts as compensation for IRA purposes, he put together the following:

Compensation includes:

  • Any amount shown in box 1 of Form W-2: Wages, salaries, commissions, professional fees, bonuses, other amounts received for personal services
  • Net self-employment income (reduced by contributions to employer plans and the deduction for self-employment taxes)
  • Net self-employment income from personal services (e.g., clergy, professional traders) even if it is not subject to self-employment tax (reduced by contributions to employer plans and the deduction for self-employment taxes)
  • Taxable alimony and/or maintenance payments
  • Combat pay (even though it may be excluded from federal income tax)
  • Accrued vacation pay
  • Director’s fees, jury fees
  • Scholarship or fellowship payments if included in Box 1 of a W-2

Compensation does not include:

  • Pension and annuity income: IRA, Roth IRA, company plan distributions and non-qualified annuity distributions, Social Security benefits
  • Rental income (unless it is the taxpayer’s business)
  • Interest income, dividend income, capital gain income, certain income from partnerships, S-Corp income, amounts excluded from income (other than combat pay)
  • Child support
  • Life insurance proceeds
  • Deferred compensation
  • Severance pay
  • Disability payments and unemployment insurance

Source: irahelp.com

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 5)

View all Comments »
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    • You’d is the contraction of you and would.

    • [...] What counts as “compensation” you can contribute to an individual retirement account? For most people, it’s pretty simple: earned income, mainly your paycheck. But other times it isn’t so easy to determine. [...]

    • The one thing the article should have emphasized for completeness, was the allowability of a “spousal IRA,” where a husband or wife in a joint tax situation can contribute to an IRA, even if he or she does not have earned income.

    • No wonder our students do badly on SAT’s. Look at this title using the word “YOU’D Where did they get that word from?

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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131.79MDow Volume:
Avg Vol: 112.32M
Unchanged
186
Decliners
2190
Advancers
4209
Price Chg %Chg 1 Day
Range: 1 Day
  • 1 Day
  • 5 Days
  • 1 Month
  • 3 Months
  • 6 Months
  • 1 Year
  • 2 Years
Dow
/quotes/zigman/627449/realtime 16,643 -12 0.07%
Nasdaq
/quotes/zigman/12633936/realtime 4,828 +16 0.32%
S&P 500
/quotes/zigman/3870025/realtime 1,989 +1 0.06%
GlobalDow
/quotes/zigman/629063/realtime 2,372 -2 0.07%
Gold
/quotes/zigman/662444/delayed 1,134 0 0.00%
Oil
/quotes/zigman/2331095/delayed 44.57 -0.65 1.44%
FTSE 100
/quotes/zigman/3173262/delayed 6,248 +56 0.90%
DAX
/quotes/zigman/2380246/delayed 10,299 -17 0.17%
CAC 40
/quotes/zigman/3173214/delayed 4,675 +17 0.36%
FTSE MIB
/quotes/zigman/1482176/delayed 21,994 -208 0.93%
IBEX 35
/quotes/zigman/2759620/delayed 10,353 +63 0.61%
Stoxx 600
/quotes/zigman/2380150/delayed 363 +1 0.28%
Asia Dow
/quotes/zigman/6959860/realtime 2,785 -13 0.47%
Nikkei 225
/quotes/zigman/5986735/delayed 18,888 -248 1.30%
Hang Seng
/quotes/zigman/2622475/delayed 21,602 -11 0.05%
Shanghai
/quotes/zigman/1859015/delayed 3,154 -78 2.42%
Sensex
/quotes/zigman/1652085/delayed 26,401 +9 0.03%
Singapore
/quotes/zigman/1709939/delayed 2,939 -17 0.58%
Euro
/quotes/zigman/16008136/realtime/sampled 1.12 +0.01 0.55%
Yen
/quotes/zigman/16008150/realtime/sampled 121.16 -0.54 0.44%
Pound
/quotes/zigman/16008140/realtime/sampled 1.54 +0.00 0.24%
Australia$
/quotes/zigman/16008115/realtime/sampled 0.72 0.00 0.24%
DXY Index
/quotes/zigman/1652083/delayed 95.71 -0.27 0.28%
WSJ $ Idx
/quotes/zigman/41508961/realtime 88.30 -0.20 0.23%
U.S. 10yr
/quotes/zigman/15866666/realtime 2.16 -0.02 0.81%
German 10y
/quotes/zigman/15866409/realtime 0.75 +0.00 0.17%
Italy 10yr
/quotes/zigman/15866497/realtime 1.91 -0.02 0.80%
Spain 10yr
/quotes/zigman/15866444/realtime 2.06 +0.01 0.26%
U.K. 10yr
/quotes/zigman/15866328/realtime 1.85 -0.02 0.96%
Japan 10yr
/quotes/zigman/15866525/realtime 0.38 0.00 0.05%
Crude Oil
/quotes/zigman/2331095/delayed 45 -1 1.44%
Gold
/quotes/zigman/662444/delayed 1,134 0 0.00%
Corn
/quotes/zigman/7599553/delayed 377 +2 0.40%
DJIA F
/quotes/zigman/38649152/delayed 16,497 -162 0.97%
S&P F
/quotes/zigman/30356461/delayed 1,971 -19 0.97%
Silver
/quotes/zigman/3134148/delayed 15 0 0.23%

Quotes

Symbol Price Change % Change
FB /quotes/zigman/9962609/composite 91.01 1.28 1.43%
AAPL /quotes/zigman/68270/composite 113.29 0.37 0.33%
GOOG /quotes/zigman/30194416/composite 630.38 -7.23 -1.13%
BAC /quotes/zigman/190927/composite 16.36 -0.08 -0.49%
C /quotes/zigman/5065548/composite 53.28 -0.16 -0.30%
F /quotes/zigman/264304/composite 13.74 0.18 1.33%
T /quotes/zigman/398198/composite 33.29 -0.15 -0.45%
BP /quotes/zigman/247026/composite 33.26 0.23 0.70%
GE /quotes/zigman/227468/composite 25.16 0.15 0.60%
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Rates »

5 yr CD
1.5%
2 yr CD
0.8%
1 yr CD
0.6%
MMA $10K+
0.3%
MMA $50K+
0.4%

National averages from Bankrate.com

You Don’t Need Another Credit Card, You Need A Better One.
Avg. APR Last Week 6 Months
Low Interest 11.62% 11.62% 11.53%
Business 12.85% 12.85% 12.85%
Student 13.14% 13.14% 13.14%
Balance Transfer 14.12% 14.12% 14.00%
Airline 15.10% 15.10% 15.15%
Reward 15.14% 15.14% 14.99%
Cash Back 15.27% 15.27% 15.26%
Instant Approval 18.00% 18.00% 17.93%
Bad Credit 22.73% 22.73% 22.48%
Source:CreditCards.com

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