Pension/Annuity considered earned income for traditional IRA purposes???


M

mouln

I have a conventional IRA. I understand yearly contributions to the IRA
account are deductible on your 1040 if your earned income for year is
less than $70,000.
Would an annuity (govt pension) be considered earned income towards
this $70,000 limit???
Thanks for your help!
 
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M

Mark Freeland

Marlowe said:
No, a pension is considered unearned income.
Marlowe's answer is correct (that a pension is not earned income), but
it doesn't matter.

Assuming you are covered by a plan (which I infer from your mention of a
$70K limit), then your contribution is limited based on your Modified
Adjusted Gross Income (MAGI), not your earned income.

IRS Publication 590,
http://www.irs.gov/publications/p590/ch01.html#d0e2003

To compute your MAGI, look at Worksheet 1-1. Basically, it is your
Adjusted Gross Income (AGI) with some modifications that don't deal with
pensions. So, if your pension is taxable (and thus included in your
AGI), then it is included in your MAGI, and will affect the
deductibility of your IRA.

What you are calling "earned income" for IRAs is what the IRS calls
"compensation". Don't confuse the two - you can't contribute more than
your compensation (except for spousal IRAs), while MAGI is used to
determine whether what you contribute to the traditional IRA is
deductible. (It is also used to determine whether you can contribute to
a Roth IRA.)

In fact, Pub 590 says, with a big exclamation point (CAUTION!): "Do not
assume that your modified AGI is the same as your compensation. Your
modified AGI may include income in addition to your compensation such as
interest, dividends, and income from IRA distributions."

It may also include pensions (see, e.g. line 16b on form 1040).
 

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