Your Tricky IRA Compensation and Contribution Questions Answered
By Ben Maas, CIS, CIP, CISP
One of our clients is a 22-year-old IRA owner who is receiving sizable stock dividends. He also is expecting to have about $4,000 in earned income this year. He wants to contribute the maximum amount to his Roth IRA for 2026. Can he contribute the maximum amount to his Roth IRA?
No. Individuals may only use compensation earned from services rendered (earned income) to support the funding of a Roth or Traditional IRA. Because your IRA owner has $4,000 in earned income, he may contribute only $4,000 total to his IRAs.
Another one of our IRA owners has quarterly stock dividends deposited directly into his savings account at our financial organization. The annual deposits are around $10,000. He also works full-time and has $115,000 in eligible compensation. Is he allowed to use his dividends to fund a regular contribution to his Traditional or Roth IRA?
Yes. IRC Sec. 219 requires that individuals have eligible compensation during the tax year for which they wish to make an IRA contribution. There is no requirement that individuals actually use the eligible compensation as a specific funding source when making the IRA contribution.
One of our clients made a contribution to his Roth IRA early in 2025, but he ended up exceeding the MAGI limit, making him ineligible to contribute. He would still like to take advantage of a Roth IRA. Does he have any options?
Yes. He has until his 2025 tax return due date, including extensions, to recharacterize his Roth IRA contribution (along with the net income attributable, or NIA), to a Traditional IRA. Once he has done so, he may convert all or part of his Traditional IRA assets to his Roth IRA.
If he chooses to do this, the following tax forms will need to be created over a two-year period.
2025 Form 5498 reporting the regular contribution to the Roth IRA
2026 Form 1099-R reporting the recharacterized contribution leaving the Roth IRA
2026 Form 5498 reporting the recharacterized contribution going into the Traditional IRA
2026 Form 1099-R reporting the converted amount leaving the Traditional IRA
2026 Form 5498 reporting the converted amount going into the Roth IRA
He will also need to work with his accountant to determine whether he can fully deduct the recharacterized Traditional IRA contribution. If he cannot fully deduct the contribution, or if he already has nondeductible IRA assets, his conversion will be taxed pro rata (see Roth Conversion Strategies, for more information).
One of our clients owns two sole proprietorships: one business has a $50,000 net profit and the other business has a $45,000 net loss. In cases such as these, must the client aggregate the gain and the loss to determine her eligible compensation for purposes of making an IRA contribution?
Yes. For sole proprietorships, business income is aggregated to determine an individual’s eligible compensation (earned income) for IRA contribution purposes. In this case, because one business reported a $50,000 profit and the other business reported a $45,000 loss, she would have $5,000 in eligible compensation for purposes of making a Traditional or Roth IRA regular contribution. (Income earned by a compensated spouse, if present, could potentially make up the shortfall in contribution eligibility.)
We have a client who passed away last year. His spouse, who is retired, would like to make a prior-year contribution to his Traditional IRA and to her Traditional IRA. The decedent had $30,000 in eligible compensation for 2025 and his spouse plans to file a joint tax return. May she make contributions to both IRAs?
No. Contributions generally cannot be made to a decedent’s IRA unless the transactions were initiated before his death. But because the spouse is filing a joint tax return, she can make a prior-year spousal contribution to her own Traditional IRA.
