I received a taxable retirement account from divorce -rolled most, cashed a portion for attorney fees- Is that earned income/Magi - Can I still contribute to my Roth IRA?

[lisalisa]

During divorce, as part of the settlement, I was awarded a portion of a TSP (Thrift Savings Plan) account.  I rolled most into my 401k, and cashed some out to pay divorce attorney fees (had tax withheld).  Does this count as earned income and affect my Modified Adjusted Gross Income?  I have a Roth IRA and now I'm not sure if I need to pull that money out to avoid a penalty.  (I contributed to the Roth IRA after the divorce was final, but before receiving the TSP settlement.

[Lisa995]

"Is that earned income/Magi"

Earned income comes from working, so no, its not "earned" income.

[Rainman12]

"I contributed to the Roth IRA after the divorce was final" - Did you have any Earned income (W-2 wages, or net Self-Employment) for the year your Roth contribution was made?

[lisalisa]

Yes, from work, but I’m within the limits unless I have to include the military pension I’m now receiving monthly, along with the TSP withdrawal.

[Lisa995]

Taxable portions of pensions and TSP withdrawals will be included in MAGI

[macuser_22]

All taxable income must be included in MAGI.

If your MAGI was over the limit to contribute to  Roth, then the contribution is an excess subject to a 6% penalty that repeats each year until removed of can be applied to a subsequent year that you are not over the limit.  To avoid the 2018 penalty, if you timely by the April 15 due date, then you have until Oct 15 to remove the excess., otherwise the 2018 6% penalty will apply.

[lisalisa]

I’m getting a lot of opposite answers online and offline.  Some say that only “earned income” is counted for Roth IRA and some say All taxable income is included for Roth IRA.  I’m meeting with an expert to find out the actual answer, but I did notice you can only use earned income and not pensions or other to actually contribute to a Roth IRA.  Thank you

[lisalisa]

Thank you very much!

[macuser_22 · Accepted solution]

You are mixing apples an oranges.  There are two Roth limitations.  One is earned income and the other is total income.

1) For 2018 you cannot contribute more than $5,500, or $6,500 if you’re age 50 or older by the end of the year; or
    your taxable compensation for the year.
   
    (Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deducible part of the SE tax, but can include commissions, alimony and separate maintenance, and nontaxable combat pay ).  

2) To be able to contribute to  Roth IRA at all, reguardless of whether you have sufficient earned income at much as the contribution, your total MAGI must also be less than the limits for your filing status.  All income is part of your AGI including any retirement income that is taxable.

See this IRS article for Roth contribution limits:
https://www.irs.gov/retirement-plans/roth-iras