Divorce, Alimony and Contributing to an IRA
Updated: May 1, 2021
With tax deadlines rapidly approaching, you may be wondering if you can contribute to your IRA based on the money you receive as alimony. The answer: It Depends!
The ability to contribute to an IRA requires that you have earned income. Usually, we think of earned income as money we get from our job. Earned income may include commissions, bonuses and income from self-employment. It also includes alimony on which you, as the recipient, pay taxes.
Prior to 2019 the spouse paying alimony received a tax deduction for the payment. These alimony payments were taxable to the recipient. Because they were taxable, they were considered earned income for the recipient. This enabled the spouse receiving alimony to make an IRA contribution even if that spouse had no other source of earned income.
The Tax Cut and Jobs Act (TCJA) of 2017 changed the taxation of alimony. For divorce agreements beginning on January 1, 2019, alimony is no longer deductible by the payor. It is now tax-free income to the recipient. This means that alimony no longer qualifies as earned income and cannot be used to fund an IRA.
Therefore, your ability to use alimony to fund an IRA depends on the date of your divorce, or divorce agreement modification. In short:
If you pay taxes on the alimony you receive you may count it to fund an IRA.
If you do not pay taxes on the alimony you receive you may not count it to fund an IRA
Even if you can no longer fund an IRA there are ways to set aside money on a tax deferred basis for retirement. Please consult with your financial advisor and accountant on how to manage money for your retirement.