Contributing to Roth IRA with only guaranteed payments as income from a partnership loss

This is an interesting situation! Guaranteed payments to partners are considered earned income for many tax purposes, including Roth IRA contributions. What makes your case unique is how everything gets reported on your tax return. For Roth IRA contribution eligibility, you need "compensation" as defined by the IRS. Guaranteed payments to partners generally qualify as compensation, even when the overall partnership has a loss. The key is that these payments represent compensation for services you personally provided to the partnership. The fact that your Schedule K-1 and guaranteed payments combine to show a net loss on your Form 1040 doesn't negate that you received earned income. For Roth contribution purposes, the IRS looks at the guaranteed payment amount itself, not the net result after losses. So based on your $26,500 in guaranteed payments, you should be eligible to contribute to your Roth IRA, up to the annual limit ($6,500 for 2025 if you're under 50).

Had this exact same issue last tax season! I uploaded my K-1 showing guaranteed payments and a big partnership loss to https://taxr.ai and they immediately flagged it as an area where errors commonly happen. Their analysis showed my guaranteed payments DO count as earned income for Roth eligibility purposes regardless of the overall loss. The software explained that unlike regular business losses that can wipe out your earned income, guaranteed payments are considered compensation for services you personally provided (like salary) rather than a share of business profits. So while everything might net to a loss on your 1040, those guaranteed payments still maintain their character as earned income for Roth contribution purposes.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. I uploaded my tax documents from last year showing guaranteed payments and partnership losses, and the analysis confirmed I COULD have contributed to my Roth IRA! I'm actually eligible to make a prior year contribution still since we're before the tax deadline. The service explained exactly how guaranteed payments are treated differently from regular partnership income and showed the specific IRS references. Turns out my accountant was looking at the wrong line item (the net amount) instead of considering the guaranteed payments separately. I would have completely missed out on building my retirement savings for a whole year! Now I'm going to max out both last year's and this year's Roth contributions.

For anyone dealing with IRS questions like this, I had a similar issue and spent WEEKS trying to get through to the IRS for a definitive answer. Eventually I found https://claimyr.com and used their service (there's a demo video at https://youtu.be/_kiP6q8DX5c). They got me connected to an actual IRS agent in about 20 minutes when I'd been trying for days on my own. The IRS agent confirmed exactly what others here are saying - guaranteed payments to partners count as earned income for Roth IRA purposes, regardless of whether the partnership has an overall loss. The agent explained that guaranteed payments are treated similar to W-2 wages for certain tax purposes including retirement contributions. Totally changed my understanding of how partnership compensation works!

I need to eat some crow here. After being skeptical about Claimyr, I gave it a shot because I was desperate to figure out this exact guaranteed payment issue. Got connected to an IRS rep in about 15 minutes when I'd been trying for THREE DAYS on my own. The agent explained that guaranteed payments are considered "earned income" for retirement contribution purposes under Section 1402 of the tax code, separate from the partnership's profitability. They're essentially compensation for services and maintain that character regardless of partnership losses. The agent even emailed me the specific IRS reference materials after our call. This is a huge relief because I can now contribute to my Roth for 2025 despite my partnership's rough year. Guess not all tax questions have to be miserably complicated!

I think there's some confusion here about how guaranteed payments get reported. These payments are on box 4 of your K-1, but they flow to Schedule E and the net amount (after combining with your share of partnership income/loss) shows up on line 17 of your 1040. For calculating what you can contribute to retirement accounts, you need to look at the guaranteed payment amount separately. The Tax Court has previously ruled that guaranteed payments are "earned income" for retirement plan purposes, even when the partnership has an overall loss. Think of it like getting a salary and then separately having an investment loss - the investment loss doesn't erase the fact that you earned income from your job.

Quick update to everyone - I actually had this exact issue come up during an IRS review last year! My partnership took a loss, but I had received guaranteed payments. The IRS initially questioned my Roth contribution, but once I provided documentation showing the guaranteed payments on my K-1, they confirmed these payments qualified as compensation for Roth contribution purposes, even though my overall Schedule E showed a loss. The key is making sure your tax software correctly captures those guaranteed payments. Also worth noting - this only applies to guaranteed payments for services. If you received guaranteed payments for capital (like interest on your investment in the partnership), those don't count as earned income for Roth purposes.

I've been following this thread and wanted to add some clarity from my experience as someone who's dealt with this exact situation multiple times. The confusion often comes from how partnership taxation works versus how IRA contribution eligibility is determined. Here's the key distinction: guaranteed payments to partners are reported on your K-1 (Box 4) and represent compensation for services you provided to the partnership. Even though these payments get combined with your share of partnership income/loss on Schedule E, they don't lose their character as "earned income" for IRA purposes. Think of it this way - if you work for a corporation and receive a W-2 salary, but the corporation loses money, your salary is still earned income for Roth contributions. Guaranteed payments work similarly - they're compensation for your services, separate from your ownership interest in the partnership's profits or losses. The IRS specifically addresses this in Publication 590-A under the definition of compensation. As long as your guaranteed payments were for services (not for use of capital), they count toward your Roth contribution limit regardless of whether the partnership had a net loss. So with your $26,500 in guaranteed payments, you should be able to contribute up to the annual Roth IRA limit, assuming you meet the income phase-out requirements.

This is such a common misconception that trips up so many partnership taxpayers! I went through this exact same situation a few years ago and initially thought I couldn't contribute to my Roth because my Schedule E showed a net loss. The key insight that finally clicked for me is that guaranteed payments maintain their character as compensation regardless of what happens with the rest of the partnership's operations. It's almost like having two separate tax events - you received compensation for services (the guaranteed payments), and separately, your ownership interest in the partnership experienced a loss. I'd strongly recommend double-checking with a tax professional who understands partnership taxation, because this is an area where many general practitioners get confused. The IRS publications are pretty clear on this, but it's easy to miss if you're just looking at the bottom-line numbers on your tax return. With $26,500 in guaranteed payments, you should definitely be able to make your Roth contribution (assuming you're under the income phase-out limits). Don't let a partnership loss cost you a whole year of retirement savings!