8.2 Traditional IRA Contributions Must Be Based on Earnings
You may make contributions to a traditional IRA for 2012 of up to $5,000, $6,000 if you are age 50 or older at the end of 2012, provided that (1) you have at least $5,000/$6,000 of wages, salary, or net self-employment earnings in 2012, and (2) you have not reached age 70½ by the end of the year. If your earned income is less than $5,000 ($6,000 if age 50 or older), the contribution limit is 100% of your pay or net earned income if self-employed. If you have more than one traditional IRA, the limit applies to total contributions to all of the IRAs for the year. Contributions for 2012 may be made up to the filing deadline of April 15, 2013, for 2012 returns; this is the deadline even if you obtain a filing extension for your 2012 return.
If you are married filing jointly, you may each contribute up to $5,000 (or $6,000 if age 50 or older) to an IRA for 2012, as long as your combined compensation covers the contributions (8.3).
Deductibility.
Contributions up to the $5,000 or $6,000 limit are fully deductible on your 2012 return if neither you nor your spouse is an active participant in an employer or self-employed retirement plan. Deductions for active plan participants are phased out for single persons with 2012 modified adjusted gross income over $58,000. The phaseout threshold on a joint return is generally $92,000 for 2012 (8.3), but a more favorable $173,000 phaseout threshold applies to a jointly filing spouse who is not a plan participant (8.4).
Planning Reminder
Contribution limit increased by $1,000 if age 50 or older.
If you are age 50 or older by the end of 2012, an additional contribution of up to $1,000 may be made for 2012, increasing your contribution limit to the lesser of $6,000 (up from the general limit of $5,000) or your taxable compensation. If you are an active participant in an employer retirement plan, the $6,000 limit is subject to the phaseout rule (8.4).
Taxable compensation.
Traditional IRA contributions, whether deductible or nondeductible, must be based on taxable compensation received for rendering personal services, such as salary, wages, commissions, tips, fees, bonuses, jury fees, or net earnings from self-employment (less Keogh plan contributions on behalf of the self-employed). An IRA contribution (deductible or nondeductible) may not be based upon:
If you live in a community property state, the fact that one-half of your spouse’s income is considered your income does not entitle you to make contributions to an IRA. Your contribution must either be based on pay earned through your services or, if you file jointly, it must be allowed under the spousal IRA rules (8.3).
Working for spouse.
If you work for your spouse, you may make an IRA contribution provided you actually perform services and receive an actual payment of wages. A wife who worked as a receptionist and assistant to her husband, a veterinarian, failed to meet the second test. Her husband did not pay her a salary. Instead, he deposited all income from his business into a joint bank account held with his wife. In addition, no federal income tax was withheld from her wages. In a ruling, the IRS held that the wife could not set up her own IRA, even though she performed services; she failed to receive actual payment. Depositing business income into a joint account is neither actual nor constructive payment of the wife’s salary. Furthermore, any deduction claimed for the wife’s wages was disallowed.
Self-employed may make IRA contributions.
IRA contributions may be based on net self-employment earnings (45.1), after taking into account deductible Keogh or SEP retirement plan contributions (41.5) and the deduction for one-half of self-employment tax liability (45.3). If you have a net loss for the year, you may not make an IRA contribution unless you also have wages.
If you have more than one self-employed activity, you must aggregate profits and losses from all of your self-employed businesses to determine if you have net income on which to base an IRA contribution. For example, if one self-employed business produces a net profit of $15,000 but another a net loss of $20,000, you may not make an IRA contribution based on the net profit of $15,000 since you have an overall loss. This netting rule does not apply to salary or wage income. If you are an employee who also has an unprofitable business, you may make an IRA contribution based on your salary.
If you have a self-employed retirement plan from your business, you are considered an active participant in a retirement plan for purposes of the adjusted gross income phaseout rules (8.4).
Taxable alimony treated as compensation.
A divorced spouse with little or no earnings may treat taxable alimony as compensation, giving a basis for deductible IRA contributions. If you are divorced, you generally may make an IRA contribution for 2012 equal to 100% of taxable alimony up to the $5,000 limit ($6,000 if age 50 or older). However, if you are an active participant in an employer plan and your adjusted gross income exceeds the $58,000 threshold for unmarried individuals, see 8.4 for the phaseout of the deduction limit. Taxable alimony is alimony paid under a decree of divorce or legal separation, or a written agreement incident to such a decree; see Chapter 37. It does not include alimony payments made under a written agreement that is not incident to such a decree.
No contributions to traditional IRA allowed for those age 70½.
Even if you still have earnings, you may not make contributions to a traditional IRA for the year in which you reach age 70½, or any later year. For example, if you were born in the last six months of 1941 or the first six months of 1942, you will reach age 70½ in 2012 and may not make any traditional IRA contributions for 2012 or later years.
Planning Reminder
If you have a nonworking spouse under age 70½, you may contribute to his or her IRA, even though no contribution may be made to your own traditional IRA because you have reached age 70½ (8.3).
Qualified reservist repayments.
If you were called to active duty as a member of the reserves for over 179 days, or indefinitely, and took a distribution from your IRA during your active duty period, the distribution may be repaid to an IRA within the two-year period beginning on the day after the end of the active duty period. The repayment is allowed regardless of the regular IRA contribution limit for the year of repayment. The repaid amount is not deductible. The qualified reservist repayment must be reported as a nondeductible IRA contribution (8.6) on Line 1 of Form 8606.