Roth IRA contribution limit

Lynn234 · ‎October 17, 2021

Does a taxable lawsuit settlement count as earned income for the purposes of the Roth IRA contribution limits? Say a taxable lawsuit settlement put you over the income limit - can you still contribute to a Roth IRA since Medicare and social security were not withdrawn? Similarly, does it count toward self employment income for the contribution limits of a SEP IRA? Thanks

GeorgeDenseff · ‎October 17, 2021

No, it is not earned income. It would be taxable unearned income.

macuser_22 · ‎October 17, 2021

The IRS defines it a "Taxable Compensation" not earned income which are different.

(And the first answer is correct. Lawsuit settlements are not taxable compensation for IRA's)

See IRS Pub 590A "What is compensation" for what is allowed and disallowed.

https://www.irs.gov/publications/p590a

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**