This may seem like a fairly obscure legal question, but questions along these lines have become fairly common. As divorces between working couples become more prevalent, so do the concerns of not just dividing marital assets, but also funds for retirement and what qualifies as income.
As a general rule, you can contribute to a regular IRA or a Roth IRA, if you have qualifying income. So what counts as qualifying income?
There are three categories of qualifying income:
- Amounts earned as an employee
- Self-employment income, and
- Alimony income.
For purposes of making an IRA contribution, taxable alimony income counts as qualifying income. This is a special rule that permits you to build retirement savings in an IRA even if you rely on alimony income for your support. To qualify, the alimony must be paid under a divorce decree or separation agreement. So, even if you don't work, your alimony received is sufficient to meet the compensation requirement. The rule applies only to taxable alimony income, though. You can’t include nontaxable items such as child support.
But there are limitations on whether you can contribute to a traditional IRA or a Roth IRA.
Traditional IRAs stop accepting contributions in the year that you turn 70 1/2 years old, even if you have lots of alimony or other compensation income. For example, if you turn 70 1/2 in December 2017, you can't contribute at all during the 2017 tax year. If you're interested in contributing to a Roth IRA, your age is never an issue.
Roth IRAs have income limits instead of age limits restricting who can contribute. These limits count all your taxable income, not just your alimony, so if you have non-compensation income, such as dividends or interest that counts toward the limit, too. For example, in 2017, a single filer can't contribute to a Roth IRA if his or her modified adjusted gross income exceeds $133,000. These limits update annually.
Note that there is a perfectly legal technique called a “Backdoor Roth IRA” that may allow you to circumvent this limit. It allows you to convert a Traditional IRA into a Roth IRA, and there are no income limits for conversions.
A skilled divorce attorney is not only knowledgeable in family law but he or she must have a strong understanding of both the tax code and retirement options and should work with strong network of professionals . Does your divorce lawyer have that?
Reza Golesorkhi is widely recognized as one of a handful of elite divorce lawyers in the Maryland, Virginia and Washington D.C.area. He is a partner and divorce attorney at Joseph, Greenwald & Laake, P.A., a firm with an established track record of working tirelessly to get exceptional results. You can reach Reza directly by email at email@example.com or at 240.399.7892.