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Tax Tip of the Week
For the week of
October 21, 2002

Use your alimony to fund an IRA

Did you know you can use alimony payments you receive to open an IRA?

To be eligible for an IRA, you must have "taxable compensation." Compensation is generally defined as what you earn by working. It excludes other types of income such as interest, dividends, or rental income. But for IRA purposes, taxable payments you receive for alimony or under a separate maintenance agreement are specifically included as compensation. So even if your only source of income is alimony or separate maintenance payments, you're still eligible to open either a traditional or, unless your income is too high, a Roth IRA.

All the other IRA rules apply. For 2002, you can contribute up to $3,000 or the amount of your compensation, whichever is less. If you're 50 or older, you can make an additional catch-up contribution of $500. You can deduct a traditional IRA contribution unless you're covered by a retirement plan at work and have income above certain limits.

If your cash flow situation allows it, you should consider investing a portion of your alimony payments in an IRA. You may gain a tax deduction, and you'll start to accumulate a tax-advantaged nest egg.

Prior Tax TipsClick here to view previous tax tips.

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