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Question: My client recently divorced her husband. She is collecting defined benefit pension benefits from his plan pursuant to a QDRO. She is also collecting substantial alimony, and does not have any other earned income. Can she make a deductible traditional IRA contribution?
Answer: Probably yes.
IRS Notice 87-16 says that a divorced spouse who is simply receiving pension distributions from her ex-husband’s qualified plan is not an active participant in the plan.
Here are two key excerpts:
A4: If a married individual obtains a divorce during his or her taxable year (and does not remarry during such year), is the individual considered an active participant merely because the former spouse is an active participant for the year?
A: No. Marital status is determined as of the end of the year. Thus, if the individual is not married at the end of the year, the fact that his or her former spouse is an active participant will not cause the individual to be treated as an active parti cipant. Similarly, if an individual marries during the year, and the individual’s new spouse is an active participant, the individual shall be treated as an active participant for the entire year if the couple files a joint tax return.
A8: Is a retired individual who is receiving pension annuity payments an active participant?
A: No. An individual will not be treated as an active participant merely because the individual receives benefits under a retirement arrangement described in section 219(g)(5) of the Code.
A person receiving alimony is eligible to use that income to make a traditional IRA contribution. Someone who is not an active participant in a qualified plan is able to deduct the contribution from federal income taxes without regard to her taxable income.
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