A Roth IRA reverses the logic of a traditional IRA. Instead of making tax-free contributions, you pay income tax on the money that goes in your Roth, just like all your other earnings. When you make qualified withdrawals contributions later, however, there's no tax. There are rules on how you contribute to a Roth, one of which is that you can't contribute more than your compensation for the year -- and military retirement pay doesn't count.
The IRS defines compensation as "what you earn from working." That includes wages, salaries, commissions, self-employment income, alimony and non-taxable combat pay. It doesn't include investment income, earnings from rentals, or pension checks. It also specifically does not include military retirement. Technically, retirement pay is classed as reduced pay for reduced service rather than a pension. As far as the IRS is concerned, though, that doesn't qualify it as compensation.
If you're fully retired, with no money coming in but your retirement pay, you can't contribute to a Roth. If your spouse still works, though, he can contribute for you, provided you file a joint return. As long as her compensation tops $11,000, she can max out her own account -- the limit, as of 2013, is $5,500 -- and yours too. Tax laws lower the limit if you have a high adjusted gross income.
Another way to put money in a Roth is to convert one of your other retirement accounts. If, say, you have $15,000 in an IRA and convert it to a Roth, you report the $15,000 as taxable income this year. In return, you get the Roth advantages: not only tax-free withdrawals but never having to make minimum withdrawals. You can leave a Roth to your heirs without tapping the money, which is not an option with a traditional IRA.
If you mistakenly contribute your military retirement pay to a Roth, or in any way put in more money than you have earned income, the IRS won't be happy. Excess contributions trigger a 6 percent tax penalty: if you put in $1,000 too much, you owe $60 in tax. You don't have to pay if you withdraw the money, and any interest it earned, before filing taxes for the year.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.