IRA and Alimony

Among the surprises in Internal Revenue Service rules regarding IRAs is that alimony and maintenance payments may be contributed to an account. Other than that, IRA funds must be derived from what is normally considered earned income, that is, wages, salaries, tips, commissions and self-employment income. Perhaps the arduous effort involved in marriage and the bitterness that can ensue from a divorce action led the IRS to classify alimony as earned income.

Step 1

Look for your alimony payment by mail or via direct deposit.

Step 2

Contribute some or all of the payment to your traditional or Roth IRA. As of tax year 2012, you can put up to $5,000 per year, or $6,000 if you are 50 or older. The limits for tax year 2013 are $5,500 and $6,500, respectively.

Step 3

Take withdrawals only if you must. IRA money is meant to fund your later years. Although you can take out Roth contribution money tax- and penalty-free at any time, you'll lose out on the chance to have your money grow. For good reasons to take a withdrawal, even before age 59 1/2, see the tips below.

Tip

  • If you have children or want a fresh start, your IRA monies can prove useful long before retirement. Though every traditional IRA withdrawal is taxed as income, if you are not yet 59 1/2, you can avoid the 10 percent early withdrawal penalty if you use the distribution to fund a college education for yourself or your child. You can also avoid the penalty if you use the money -- up to $10,000 in your lifetime -- to support the purchase or construction of a new home. Other penalty exceptions include paying medical expenses that exceed 7 percent of your adjusted gross income.
  • While you are on your own, consider opening a Roth IRA with an eye toward wealth transfer. Because withdrawals are tax-free and don't have to take out money while you live, you can contribute the maximum to the account each year and invest for growth. When you die, the account passes to your children, provided you name them as beneficiaries. They can choose to take distributions over their respective lifetimes. As the children draw down the account, the remaining balance continues to grow as long as the investments produce income. You can even choose to leave the Roth to your grandchildren, giving the funds even more time to grow.

Photo Credits

  • Stockbyte/Stockbyte/Getty Images

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.