Is Military Retirement Pay Considered Earned Income for a Roth IRA?

Saving for retirement with a Roth IRA offers tax-free growth and withdrawals, but not all income qualifies for contributions. Understanding what counts as earned income is essential to avoid penalties or disallowed contributions.

Military retirees may wonder whether their pension payments meet the criteria for Roth IRA contributions. Only certain types of income qualify, making this distinction important.

Earned Income Criteria for Roth IRA

The IRS defines earned income as money received from active work, either as an employee or a business owner. Not all taxable income qualifies, so understanding these differences helps avoid mistakes when planning retirement savings.

Wages and Salaries

Compensation from an employer qualifies as earned income. This includes hourly wages, salaries, bonuses, commissions, and tips reported to the IRS. Taxable fringe benefits, such as employer-provided housing included in taxable income, also count.

However, employer contributions to retirement plans, such as 401(k) matches, do not qualify since they are not directly received as taxable wages. Non-taxable payments like workers’ compensation are also excluded. When reviewing a W-2 form, the amount in Box 1 (Wages, tips, other compensation) generally represents income eligible for Roth IRA contributions.

Self-Employment Earnings

Business owners and independent contractors generate earned income through their work. This includes profits from sole proprietorships, freelance work, and partnerships where the individual actively participates. These earnings are reported on tax forms such as Schedule C (Profit or Loss from Business) or Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.).

For self-employed individuals, net earnings determine Roth IRA eligibility. This is calculated by subtracting business expenses from total revenue. Additionally, the IRS requires self-employed individuals to deduct 50% of their self-employment tax before determining net earnings. For example, if a freelancer earns $50,000 in revenue and has $10,000 in expenses, their net earnings are $40,000. If their self-employment tax is $5,652, they must deduct half of that ($2,826), leaving them with $37,174 in eligible earned income.

Other Taxable Compensation

Some other forms of taxable compensation qualify as earned income. Taxable alimony from divorce agreements finalized before 2019 counts, as it is considered part of the recipient’s taxable income. However, for agreements created or modified after 2018, alimony is no longer deductible by the payer or taxable for the recipient, meaning it does not count as earned income.

Jury duty pay, taxable scholarships and fellowships, and certain disability payments also qualify. If a scholarship recipient must perform teaching or research duties as a condition of receiving the grant, that portion of the scholarship is considered earned income. Similarly, long-term disability benefits received before retirement age, when reported as taxable income, may qualify.

How Military Retirement Pay Is Classified

Military retirement pay is considered pension income rather than wages from active employment. The IRS classifies it as taxable income, but it does not meet the definition of earned income for Roth IRA contributions. Pension payments come from prior service rather than current work, similar to Social Security and corporate pensions.

Military retirement pay is reported on Form 1099-R, which documents the total taxable amount received during the year. Unlike wages, which appear on a W-2, pension income does not count toward earned income calculations for Roth IRA eligibility.

Some military retirees receive additional payments, such as Combat-Related Special Compensation (CRSC) or Concurrent Retirement and Disability Pay (CRDP). CRSC is tax-free and compensates for service-connected disabilities, while CRDP restores full pension amounts for those eligible for both military retirement and VA disability benefits. Neither of these payments qualifies as earned income for Roth IRA contributions.

Combining Military Retirement Pay With Other Earnings

Military retirees cannot use their pension alone to contribute to a Roth IRA, but they can qualify if they earn additional income through employment or business activities. Many veterans transition into civilian careers, working full-time, part-time, or as contractors. These earnings count as compensation and qualify for Roth IRA contributions.

Some retirees start businesses, work as consultants, or engage in freelance work. Income from these ventures qualifies as long as it is reported as net earnings from self-employment. Veterans who establish LLCs or sole proprietorships should track profits and deduct allowable expenses, as only net earnings count toward Roth IRA eligibility.

For those combining traditional employment with self-employment, all sources of earned income can be used to determine the total amount available for Roth IRA contributions. However, IRS contribution limits still apply. In 2024, the maximum contribution is $7,000 for individuals under 50 and $8,000 for those 50 and older. These limits may be adjusted in future years based on inflation.