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I think you invest the $5,000 you received from the settlement which is not taxable into a taxable traditional IRA account. A traditional IRA is a personal savings plan that allows a taxpayer to accumulate money tax deferred until retirement. You have to have wages, salary (compensation) income to invest into a IRA account. For 2007, IRA contributions cannot exceed the lesser of $4,000 or compensation received for rendering personal services. For taxpayers age 50 or older, the limit increases to the lesser of $5,000 or compensation.