You can set up and make contributions to a traditional IRA if:
- You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
- You were not age 701/2 by the end of the year.
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct
If both you and your spouse have compensation and are under age 701/2, each of you can set up an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation. taxmap/pubs/p590-002.htm#en_us_publink1000230355
Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1
. Compensation includes all of the items discussed next (even if you have more than one type).
Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2. taxmap/pubs/p590-002.htm#en_us_publink1000230358
An amount you receive that is a percentage of profits or sales price is compensation. taxmap/pubs/p590-002.htm#en_us_publink1000230359
If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
- The deduction for contributions made on your behalf to retirement plans, and
- The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. taxmap/pubs/p590-002.htm#en_us_publink1000230360
If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation. taxmap/pubs/p590-002.htm#en_us_publink1000230361
For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance. taxmap/pubs/p590-002.htm#en_us_publink1000230362
For IRA purposes, compensation includes military differential pay you receive. Military differential payments are those payments made by some employers to employees who have been called to active duty in the uniformed services for a period of more than 30 days. Beginning in 2009, these payments will be reported in box 1 (Wages, tips, other compensation) of Form W-2.taxmap/pubs/p590-002.htm#en_us_publink1000230363
If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2009 Form W-2 with code Q.
If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you could contribute more for those years than you already have, you could have made additional contributions to an IRA for 2004 or 2005 by May 28, 2009. The contributions are treated as having been made on the last day of the year you designate. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return, by the latest of:
- 3 years from the date you filed your original return for the year for which you made the contribution,
- 2 years from the date you paid the tax due for the year for which you made the contribution, or
- 1 year from the date on which you made the contribution.
Table 1-1. Compensation for Purposes
of an IRA
| Includes ...|| Does not include ...|
| || earnings and profits from|
|wages, salaries, etc.|| |
| || interest and|
| || pension or annuity|
|self-employment income.|| |
| || deferred compensation.|
|alimony and separate maintenance.|| |
| || income from certain |
|military differential pay.|| |
| || any amounts you exclude|
|nontaxable combat pay.|| |
| || |
Compensation does not include any of the following items.
- Earnings and profits from property, such as rental income, interest income, and dividend income.
- Pension or annuity income.
- Deferred compensation received (compensation payments postponed from a past year).
- Income from a partnership for which you do not provide services that are a material income-producing factor.
- Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.