Contributions. To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.

Do IRA contributions reduce earned income?

Contributions to a traditional IRA can reduce your adjusted gross income (AGI) for that year by a dollar-for-dollar amount. Contributions to a Roth IRA do not lower your adjusted gross income.

What makes severance pay eligible for IRA contributions?

Because severance pay is reported to the IRS as salary, it is eligible for contribution to an IRA. The IRS stipulates that individual retirement accounts be funded with earned income. This can include wages, salaries, commissions, tips, self-employment income and military pay. Even taxable alimony is considered earned income.

What makes an IRA contribution count as compensation?

(If you are married, you and your spouse’s combined IRA contributions are limited to your combined such compensation.) The income in question must be something that is included in your gross income (e.g., foreign earned income that is excluded would not count), and It has to be income that counts as compensation. So what counts as compensation?

Where does severance pay go on a tax return?

Severance Pay. The IRS classifies severance pay — money paid to you when you separate from your employer — as earned income. As further evidence, severance pay is included in Box 1 of Form W-2 — the box that includes wage and salary income — which you receive from your employer each January.

Do you have to have earned income to contribute to an IRA?

You have to have earned income to make an IRA contribution, but there are limitations and exceptions. This week’s Ask Carrie column explains. IRA contributions can only be made from what the IRS defines as earned income. But wages aren’t the only type of income that qualifies.