Ask Bob: Can I Contribute to an IRA/Roth IRA Using Proceeds from the Sale of a Business?

Doug Gjerde, a member of Ed Slott's Elite Advisor Group, explains how and when a Retirement Daily reader could use payments received from the sale of a business to add to an IRA or Roth IRA.
Author:
Publish date:

Question

My wife sold her company in December 2018. We’re being paid on a quarterly basis for it, acting as a bank. Does that money qualify me to continue to fund an IRA? Or a Roth IRA?

Answer

There is an eligibility requirement that will make this money unlikely to qualify for a contribution, says Doug Gjerde, CFP, managing partner at Heritage Financial Partners, and an Ed Slott Elite Advisor Group member. 

“To contribute to an IRA or Roth, you, and/or your spouse must have ‘earned compensation,’ such as wages, salaries, commissions, tips, bonuses, or net income from self-employment,” he explains. “The type of income that qualifies someone for an IRA contribution is usually subject to FICA or self-employment taxes. Usually this means income that appears on a W-2 or schedule C, if self-employed.”

The contribution rules also outline types of income that don’t qualify as compensation (generally referred to as unearned income. The following do not qualify as compensation for contribution:

 - Earnings and profits from property like rental income, royalties

 - Interest and dividend income

 - Pensions or annuity income

 - Unemployment income

 - Social Security

 - Income from certain partnerships

 - Any amounts you exclude from income

“I can foresee a portion of your wife’s proceeds having a chance to qualify if it is reported as taxable earned income. For example, some sellers are paid a portion of the sales price as a consulting fee for a number of years,” Gjerde says. How it is reported depends on the agreement reached between the seller and the buyer.

However, Gjerde notes, there is no age limit to make contributions, thanks to the SECURE Act. “Before January 1 of 2020 you could only contribute to an IRA if you hadn’t yet turned 70 ½,” he says.

Got questions? Get answers!

Got questions about Social Security, Medicare, retirement, investments, or money in general? Get answers. Email Robert.Powell@Maven.io. Kim McSheridan assisted with this report. 

Question

My wife sold her company in December 2018. We’re being paid on a quarterly basis for it, acting as a bank. Does that money qualify me to continue to fund an IRA? Or a Roth IRA?

Member Exclusive

Get Access to Our Exclusive Content