Difficulty of Care Payments & Nondeductible Contributions
You may be able to make additional nondeductible IRA contributions (after December 20, 2019) if you received difficulty of care payments, which are a type of qualified foster care payment. As a result, income that previously did not qualify for contributions now qualifies. For more information on nondeductible IRA contributions, see the IRS website HERE.
If you provide care to an individual who has a physical, mental, or emotional handicap, the difficulty of care payments are generally excluded from income. Now those funds can be included when calculating your contribution. Contact your competent tax professional to determine how to report these payments, if necessary, on your tax return.
Additional Income for Retirement Contributions
Amanda Han, co-founder of Keystone CPA ,explains, “This relates to certain income such as In-Home-Supportive-Services (IHSS) income. If you earn difficulty of care payments (i.e., to take care of your disabled child), that income from the government can sometimes be tax-free.”
Han further explains, “If that income was tax-free, in the past you could not use that to make contributions to retirement accounts. However, the SECURE Act changed that. Under the new rules, even if you have tax-free difficulty of care income, it may still be considered compensation and may be used to calculate retirement contributions.”
Does This Mean I Can Contribute More?
Contribution limits remain the same regardless of your account type, but if you receive Difficulty of Care Payments, those funds also count toward your earned income used to contribute.