CARES Act Payment and IRA Contributions

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Nevada is representative of a common inquiry related to IRA contributions. “My client wants to know the following:  “Can I use my $1,200 Coronavirus Aid, Relief, and Economic Security (CARES) Act payment to make an IRA contribution? My other income comes from Social Security, pension payments and interest income payments.”

Highlights of the Discussion

Unfortunately, no, the CARES Act payments are actually “Recovery Rebates” or “credit against taxes,” according to Section 2201 of the CARES Act and, therefore, would not be considered earned income for IRA contribution purposes [see Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)].  An individual must have wages or self-employment income to make an IRA contribution. Wages and self-employment income are commonly referred to as earned income.  Social Security, pension and interest income are not considered earned income for IRA contribution purposes, either. 

The CARES Act payments are an early credit on a tax filer’s 2020 tax liability. The IRS will use the tax filer’s 2018 tax return to determine benefits, unless the individual or couple has already filed their 2019 Federal tax return. Individuals who are not dependents may receive up to $1,200 (i.e., single filers and heads of households); joint filers can receive up to $2,400; and there is an additional rebate of $500 per qualifying child, if they have adjusted gross income (AGI) under $75,000 (single), $150,000 (joint), or $112,500 (heads of household) using 2019 tax return information. The rebate phases out by $50 for every $1,000 of income earned above those thresholds. 

If your client had some self-employment or even part-time wage income from actual service performed, then an IRA contribution based on such income would be feasible. 

Conclusion

What can and cannot be used as eligible earned income to support an IRA contribution can be confusing. While CARES Act Recovery Rebates are welcome relief, they are not considered income for IRA contribution purposes.