What form of income does not count as taxable compensation when setting up a traditional IRA?

When establishing a traditional IRA, taxable compensation is key in determining how much you can contribute. The correct answer, which is annuity income, does not count as taxable compensation for IRA contributions. This is because traditional IRAs are funded primarily through earned income, such as wages, tips, or commissions, which are considered taxable compensation.

Annuity income, on the other hand, is often derived from investments or other non-employment sources, rather than being earned from working. Therefore, it is not classified as earned income under IRS guidelines and does not qualify as compensation for the purposes of IRA contributions. This distinction is essential for individuals looking to contribute to a traditional IRA, as it helps ensure that only eligible forms of income are considered for contribution limits.

In contrast, wages, tips, and commissions are all forms of earned income, making them eligible forms of compensation that can be used to contribute to a traditional IRA. Understanding these classifications is crucial for proper retirement planning and ensuring compliance with IRS regulations.