Ask the tax adviser
IRA rules for an individual on disability
Dear Tax Talk:
I am receiving third-party sick pay and Social Security for a permanent
disability. I have no other earned income. The sick pay is fully
taxable and reported the same way as regular earnings on my tax
return. If I make an individual retirement account contribution,
would I be eligible to take an IRA deduction?
These days, you're in luck.
Generally, to be able to contribute to an IRA you
must have compensation. Third-party sick pay is also known as disability
income and, in general, would not be considered compensation.
This was pretty much the interpretation of the IRS
until 1990. But in the interest of simplifying tax administration,
the IRS ruled in 1991 that any amount properly shown in box 1 of
Form W-2 will be treated as compensation for purposes of the IRA
contribution limitation. So, as third-party sick pay is properly
reported in Box 1 of Form W-2, you can make an IRA contribution.
-- Posted: Feb. 22, 2002