You can put money from any source you choose into your IRA. How much of your cash-surrender money you can put in is another question. Federal law sets an absolute limit on how much you can contribute to your IRA each year.
Your maximum annual IRA contribution, as of 2013, is $5,500, or $6,500 if you're over 49. That only works if you earn at least that much compensation. Compensation includes wages, salaries, bonuses, commissions, self-employment income and alimony. If, say, you earn $2,000 but get a $30,000 cash-surrender payment, all you can put in your IRA account is $2,000. No matter what you earn, you still can't contribute more than $5,500.
Adjusted Gross Income
If you want to contribute your insurance money to a Roth IRA, you run into another limit if you have a high adjusted gross income (AGI). As of 2013, your maximum annual contribution shrinks starting at $178,000 AGI on a joint return; at $188,000, you can't contribute at all. If you're single, the phase-out starts at $112,000 and zeroes out at $127,000. When you're married filing separately, it only takes a $10,000 AGI to disallow you from contributing.
If you spouse doesn't work, or only earns a limited compensation, you may be able to put some of your insurance money in her IRA. As long as the two of you file a joint return and your combined compensation is more than $11,000, you can max out contributions to both your IRAs. If you make less than that, you can only contribute up to your compensation limit. For example, if you only earn $8,000, that's $5,500 in your account but only $2,500 for your spouse.
The IRA limit is global: You don't get to put $5,500 in every IRA you have — that's the total you can contribute to all of them combined. It includes both Roth IRAs and traditional IRAs, but doesn't include money you roll over into your IRA from another account. If you have a high AGI and a 401(k) at work, it doesn't limit your ability to contribute to your IRA, but some of your contributions may become taxable.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.