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Salvage IRA contribution after divorce

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in Small Business Tax

Q I went through a bitter divorce and ended up quitting my job. In 2006, I did not earn any wages, but I had investments and received alimony. Can I contribute to an IRA? V.M., Concord, N.H.

A Yes. Although investments and other “unearned” income do not count for IRA purposes, alimony does. Therefore, you can contribute up to the lesser of the alimony received in 2006 or $4,000 ($5,000 if you’re age 50 or over). Assuming you are a single filer for 2006, you can deduct your IRA contribution if you were not an active participant in an employer-sponsored retirement plan.

Tip: If you were an active participant in 2006, the deduction phases out for an AGI between $50,000 and $60,000, even if most of the income is unearned.

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