Page 7

What Is Compensation? Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type). Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for provid- ing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compen- sation for IRA purposes only if shown in box 1 of Form W-2. Commissions. An amount you receive that is a percent- age of profits or sales price is compensation. Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your per- sonal services are a material income-producing factor) re- duced by the total of: • The deduction for contributions made on your behalf to retirement plans, and • The deduction allowed for the deductible part of your self-employment taxes. Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs. Self-employment loss. If you have a net loss from self-employment, don’t subtract the loss from your salar- ies or wages when figuring your total compensation. Alimony and separate maintenance. For IRA purpo- ses, compensation includes any taxable alimony and sep- arate maintenance payments you receive under a decree of divorce or separate maintenance. Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxa- ble combat pay you received. This amount should be re- ported in box 12 of your 2018 Form W-2 with code Q. Compensation for Purposes of an IRA Includes ... Doesn’t include ... earnings and profits from property. wages, salaries, etc. interest and dividend income. commissions. pension or annuity income. self-employment income. deferred compensation. alimony and separate maintenance. income from certain partnerships. nontaxable combat pay. any amounts you exclude from income. What Isn’t Compensation? Compensation doesn’t include any of the following items. • Earnings and profits from property, such as rental in- come, interest income, and dividend income. • Pension or annuity income. • Deferred compensation received (compensation pay- ments postponed from a past year). • Income from a partnership for which you don’t provide services that are a material income-producing factor. • Conservation Reserve Program (CRP) payments re- ported on Schedule SE (Form 1040), line 1b. • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. When Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions Be Made, later. How Can a Traditional IRA Be Opened? You can open different kinds of IRAs with a variety of or- ganizations. You can open an IRA at a bank or other fi- nancial institution or with a mutual fund or life insurance company. You can also open an IRA through your stock- broker. Any IRA must meet Internal Revenue Code re- quirements. The requirements for the various arrange- ments are discussed below. Table 1-1. Page 6 Chapter 1 Traditional IRAs