Definition of “Compensation” For IRA Purposes
Learn the definition of "compensation" for IRA purposes. This is more extensive than the definition of "compensation" for traditional wages from a job.
In order to have an IRA, an individual must receive “compensation.” Compensation includes:
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Wages, Tips, Bonuses, Professional fees, Commissions
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Alimony received (only if taxable)
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Net income from self-employment (reduced by the sole proprietor’s own contribution to a Keogh and the above-the-line deduction allowed for part of self-employment tax).NOTE: Do not net self-employment losses against wages to determine total compensation, and
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Non-taxable combat pay.
Effective for tax years beginning after Dec. 31, 2019: Amount included in the individual's gross income that was paid to aid the individual’s pursuit of graduate or postdoctoral study (i.e., taxable non-tuition fellowship and stipend payments). (Added to Sec 219(f)(1) by the SECURE Act)
Effective for contributions made after Dec. 20, 2019: In-home supportive care difficulty of care payments (Medicaid waiver payments) that are excluded from income. However, for traditional IRA contributions, only non-deductible contributions are allowed based on this income. (Code Sec 408(o)(5), as added by the SECURE Act) See “Medicaid Waiver Payments” in chapter 02.01 for additional information about these types of payments.
Compensation does not include rents, interest, dividends, non-taxable alimony, pensions, deferred compensation, disability payments or excluded foreign earned income.