November 8, 2016 in Taxes

Can annuity income inherited from late brother be used for a Roth IRA contribution?

Dear Tax Talk,

I have received an annuity from my brother which is considered income in respect of a decedent. This will be taxed as ordinary income when I withdraw it from the annuity. I am retired and receive my income solely from Social Security and a pension. When I receive this additional income, can I use it to contribute to a Roth IRA (within the annual limitations for my age) since this is taxed as ordinary income? Thank you.

— Phil

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Dear Phil,

Unfortunately, the answer is no.

There are several criteria for contributing to a Roth IRA. One is that you must have taxable compensation which the IRS defines as amounts received for providing personal services. These include:

Benefits of a Roth IRA

The Roth IRA is a wonderful way to let your contributions grow tax-free. While you cannot deduct your contributions when you make them, you receive the benefit of not being taxed when you take the money out if you follow the IRS regulations for “qualified distributions.”

Additionally, unlike traditional IRA accounts, you can contribute to these accounts regardless of your age, and you do not have to take required minimum distributions.

Another important criterion that must be met to contribute to these accounts is that your “modified adjusted gross income” in 2016 has to be less than:

  1. $194,000 for married filing jointly or qualifying widow(er).
  2. $132,000 for single, head of household, or married filing separately, and you did not live with your spouse at any time during the year.
  3. $10,000 for married filing separately if you lived with your spouse at any time during the year.

For 2017, the Roth IRA income limits went up slightly (to $196,000 for married filing jointly or qualifying widow(er); $133,000 for single and head of household filers).

You have not disclosed your other income amounts, so I am unable to offer any solutions for you at this time. I suggest you consider meeting with a qualified tax professional to see if you are missing out on any tax planning opportunities.

Thanks for the great question and all the best to you.

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