Does Rental Income Count for IRA Contributions?
Rental income is considered "passive," and traditional and Roth IRA contributions must come from "active" income, or compensation from working.
Question: I'm a retired real estate agent, and I manage rental properties. Does my rental income count as having a job for the purpose of contributing to an IRA?
Answer: No, earnings and profits from property don't count. Contributions to traditional and Roth IRAs must come from “active” income--that is, compensation from working. It can include wages, salaries, tips, professional fees, bonuses and other amounts you receive for providing personal services, as well as commissions and self-employment income. If you work for salary or wages, you'll receive an IRS Form W-2 for qualifying income, or if you're an independent contractor or are self-employed, you'll receive a Form 1099 MISC. Another way to know that your income qualifies is if you pay FICA or self-employment tax on it.
Earnings and profits from property, such as rental income, doesn't count as compensation. Rental income is considered passive income—that is, "money made on money," says Ed Slott, a CPA and IRA expert (www.irahelp.com). Interest and dividends are also forms of passive income.
Slott suggests a couple of workarounds: You could form your own property-management company as a corporation or limited-liability company and become its employee. Then you could have a solo 401(k) (see www.irs.gov/retirement-plans/one-participant-401k-plans). Or, if you file a joint return with your spouse and your spouse has earned income, you could each contribute to your own IRAs --as long as your spouse earns enough income to cover each of your contributions. In that case, you can use your rental income to fund your spousal IRA.
For 2019, your total contributions to your traditional and Roth IRAs can't exceed $6,000 ($7,000 if you're age 50 or older) or your taxable compensation for the year, if your compensation was less than that dollar limit. If you and your spouse are funding a regular and spousal IRA, the combined contributions can't exceed the taxable compensation that you report on your joint return. Note that your Roth IRA contribution might be limited based on your filing status and income (see www.irs.gov/forms-pubs/about-publication-590-a).