By Douglas J. Sinclair June 3, 2022
If you (or, if you file a joint return, your spouse) received taxable income during the course of the year then you are eligible to open a traditional IRA. Prior to the year 2019 there were age restrictions on when one could be opened, but those restrictions have since been repealed so even if you are age 70½ or older you are eligible!
In fact, the government allows people who reached age 50 or older by the end of 2021 to not only open and IRA, but the maximum contribution for people age 50 or older increases to $7,000 (still subject to income limits, i.e. you cannot make contributions in excess of your annual compensation.)
Should you and your spouse both have compensation, you can each open up your own IRA. You can each have your own individual traditional IRA, but you cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.
What qualifies as compensation? A good question! Typically, compensation is what you earn from working. For a summary of what does and does not count as compensation please see below.
| Includes: | Doesn’t Include: |
| Wages, Salaries, etc..: Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services and is shown in Box 1 of form W-2. | Earnings and profits from property. |
| Commissions: An amount you receive as a percentage of profits or sales is a commission. | Interest and dividend income. |
Self-Employment Income: If you are self-employed, compensation is the net earnings from your trade or business reduced by:
Even if your religious beliefs make self-employment earnings non-taxable, they are still considered compensation. |
Pension or Annuity Income |
| Taxable alimony and separate maintenance (For IRA Purposes): Received under a separate maintenance or decree of divorce but only with respect to divorce or separation instruments executed on or before December 31, 2018, that have not been modified to exclude such payments. | Deferred Compensation. |
| Nontaxable combat pay: If you were a member of the U.S. Armed forces this amount should be reported in box 12 of your 2021 W-2 with code Q. | Income from certain partnerships |
| Taxable non-tuition fellowship and stipend payments: A fellowship or scholarship is generally taxable compensation if it is in box 1 of your form W-2. However, for tax years beginning after 2019 certain non-tuition and stipend and payments not reported to you on form W-2 may qualify and you should meet with your tax professional for additional clarification should you have any questions. | Any amounts you exclude from income. |
Written by Douglas J. Sinclair
Rock Hill SC and Charlotte NC
June 3, 2022