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Taking the Helm After a Divorce
Dear Jeff:
I'm going through a divorce. I would like to know if I can get a Roth IRA with the support money; my tax man didn't seem to know. Thank you, Jessie Jeff Says:
An individual may contribute the lesser of 100 percent of compensation or $2,000 per year to an Individual Retirement Account. This maximum amount is a cumulative total of all IRA contributions made during the year. Your question takes this analysis one step further and focuses on whether or not support received during your divorce is defined as compensation and, therefore, able to be contributed to an IRA.
The definition of compensation includes wages, commissions, professional fees, tips, and other amounts received for personal services. The definition also includes taxable alimony and separate maintenance payments.
Be careful! There is a difference between alimony and support. Alimony payments received are generally subject to income tax by the recipient and are deductible by the spouse making the payments. Support payments, on the other hand, are not subject to income tax. Therefore, it does not appear that they would be defined as compensation income eligible for an IRA. However, if you earned income from other sources, you may contribute to an IRA despite the fact that your support payments may actually be used to fund it.
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