IRA eligibility

[Guest baxterdale]

Please advise on a simple eligibility question.

My mother is retired.

For tax year 2001 she drews Social Security and had income from the sale of equities.

Being retired, can she contribute to her IRA and gain the benefit of the tax deduction?

My advice to date is no.

Thanks

Brian

[Archimage]

If she is under 70 1/2 she can. Any contributions after that age are considered excess contributions subject to a 6% excise tax.

[Belgarath]

Doesn't it have to be "compensation" - wages/salaries/tips? If so, it would seem to me that SS income or gains from sale of equities wouldn't qualify. Can someone please enlighten me if it is otherwise? Thanks.

[Archimage]

Yes, social security wages are considered income. Capital gains are not considered income for purposes if the IRA deduction. Basically, anything that can be reported as Adjusted Gross Income on your 1040 is considered compensation. This would include alimony, w-2 wages, social security wages, etc.

[Belgarath]

Thanks, but can you please clarify further? I thought that "social security wages" meant wages subject to social security. The way I read the post is that she is receiving actual social security payments, rather than wages. Are you saying that actual social security payments can be counted as income for purposes of IRA contributions?

[Archimage]

Yes, social security benefits are considered part of your adjusted gross income. A worksheet to help you out regarding this can be found in IRS Publication 590.

[Belgarath]

Thanks! Appreciate the info.

[Mary Kay Foss]

I think you've lost me in this exchange. Social security benefits are not compensation income that allows you to make an IRA contribution. There is an Appendix (B) in Publication 590 to help calculate the maximum IRA contribution if ALL of the following apply:

1. Social Security Benefits were received

2. Taxable compensation was received

3. Contributions were made to a traditional IRA

4. Taxpayer or spouse was covered by an employer retirement plan.

I did not think the questioner met all of these criteria. I don't see that a deduction can be made, even a nondeductible one.

[John G]

Archimage has posted wrong info above.

Working from the facts first posted: The first issue that eliminates your mother from any contribution to an IRA is that you did not describe anything that could be considered "earned income". EI must be related either to the mother or her spouse. Capital gains, gifts, scholarships, fellowship/grants, dividends, interest do NOT qualify as earned income.

To keep it short "any amount properly shown in box 1 of Form W-2", quoted straight out of Pub 590, qualifies as earned income. No W-2, very UNLIKELY you can qualify for an IRA.

Traditional IRAs also have a 70 1/2 year age limit.

Note, your mother can fund the IRAs via gift of other members of the family. For example, she might want to fully fund a ROTH IRA for a grandchild that works.... the worthy teenager scenario. If you mom is unlikely to consume all her assets during her lifetime, this option has some other attractive estate planning aspects. Again, the key is meeting all of the eligibility requirements. This would also be true for you and your spouse. Note, you mom would NOT get any tax deduction from this, a ROTH would probably make more sense.

[Archimage]

I have erred in my ways but I have seen the light! Sorry for the misinformation.

[Guest baxterdale]

Thank you for all the information, it was very helpful and educational, now my effort with her taxes can move forward.

Brian