contribute to IRA without a job, but with 'income'?

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quinsy

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Hi-

So I'm in the fortunate situation where I have extra money right now, even though I'm a 4th year who is about to enter residency in June. I had a house that I just sold and I will end up with about $25K net from it, but I am not going to buy a new house yet because my couples match partner is doing a transitional year and I'm going to wait for that person to come out to the area before we buy a house, because I want a short commute in the meantime and I'm just going to rent a cheap apartment and save my pennies. So yes, I want to save the majority of that for when we can buy a house. However. I also have a Roth IRA that's been sitting around gathering dust while I've been in med school not earning an income.

Can I contribute to my Roth IRA legally with the money I net from the house? Is that 'taxable income'? I've never sold a house before so I don't really know the tax ins and outs of it. And obviously there is only a little time to be able to make a 2006 contribution to the IRA. So, what's the deal?

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Hi-

So I'm in the fortunate situation where I have extra money right now, even though I'm a 4th year who is about to enter residency in June. I had a house that I just sold and I will end up with about $25K net from it, but I am not going to buy a new house yet because my couples match partner is doing a transitional year and I'm going to wait for that person to come out to the area before we buy a house, because I want a short commute in the meantime and I'm just going to rent a cheap apartment and save my pennies. So yes, I want to save the majority of that for when we can buy a house. However. I also have a Roth IRA that's been sitting around gathering dust while I've been in med school not earning an income.

Can I contribute to my Roth IRA legally with the money I net from the house? Is that 'taxable income'? I've never sold a house before so I don't really know the tax ins and outs of it. And obviously there is only a little time to be able to make a 2006 contribution to the IRA. So, what's the deal?

Legally, the answer is clear: You can't. You are allowed to contribute the smaller of $4000 or your total compensation + earned income. Unfortunately capital gains (like from the sale of your house) are not considered compensation or earned income for Roth IRA contribution purposes. Here is a Motley Fool page that talks more about this (though it is somewhat dated, I don't think the rules, other than the contribution limits, have changed)

http://www.fool.com/taxes/2000/taxes000114.htm

Here is Pub. 553 which lists changes and only the limits appear to have been changed:

http://www.irs.gov/publications/p553/ch03.html

Sorry.

However, in re-reading your post, did you sell the house in '06 or '07? If you sold the house in '07, you can still contribute to your Roth IRA for this year, obviously, just not for '06.
 
we had a financial planner come talk to our 4th year class, and he seemed to be advocating having people give us graduation money early so we could stick it in a roth for '06.

the question is: if my dad gives me some of his taxed income (he files me as a dependent) can I contribute it to my own roth?
 
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However, in re-reading your post, did you sell the house in '06 or '07? If you sold the house in '07, you can still contribute to your Roth IRA for this year, obviously, just not for '06.

Thanks, that is helpful. Sad, though. :)

I sold the house last week. I'm clearly planning to sock away all I can for 2007 though since I will have a job in 2007, so I can definitely hit the max for this year. It just hurts to see a year pass by (the 2006 tax year) that I didn't contribute at all, even though I had the cash on hand. sigh!

I definitely agree that graduation money is well-saved in a Roth! But I'm pretty sure it's illegal for 2006 unless you had some form of a job, which obviously few people do in med school. I don't think it matters if it has already been taxed as someone else's income, because it is your retirement savings and so the tax benefits are for you. That just seems to be logical to me, but maybe I am wrong. Your financial guy probably just figured that it was unlikely you would get caught for breaking the rules (that's my dad's philosophy, too).
 
the easiest way to "break the rule" is to call it "earned income" from your job as a tutor. but you only made $4000, the max roth contribution, which luckily is low enough where you do not owe any taxes nor need to file a return. it might be a stretch, but...
 
I did make <4000 of 1099 and wasn't planning on filing.
 
the easiest way to "break the rule" is to call it "earned income" from your job as a tutor. but you only made $4000, the max roth contribution, which luckily is low enough where you do not owe any taxes nor need to file a return. it might be a stretch, but...

where would you put that on tax form?
 
the easiest way to "break the rule" is to call it "earned income" from your job as a tutor. but you only made $4000, the max roth contribution, which luckily is low enough where you do not owe any taxes nor need to file a return. it might be a stretch, but...

This is what I think is the best way i.e. having $4000 previously from an occupation which you would classify as earned income. Since the $4000 is already taxed, you can legally contribute it to your Roth IRA. Taxed income from parents is also fair game for Roth contributions in case the parents are willing to contribute to your future retirement. =p
 
the easiest way to "break the rule" is to call it "earned income" from your job as a tutor. but you only made $4000, the max roth contribution, which luckily is low enough where you do not owe any taxes nor need to file a return. it might be a stretch, but...
I thought any earned income over $500 that wasn't earned from an employer (so no SS or medicaid tax withheld) was subject to the self-employment tax (which is about 15% for SS and 3% for medicaid - don't quote me on those numbers, I haven't looked them up recently).

If that's the case - you might not pay federal income tax but you will be expected to pay SS & medicaid.

Do you think it would still be worth it?
 
File income tax Sched C and just put on there that you made 5K.... it will be low enough that you dont have to pay taxes yet you can contribute. I dont think you would ever have to prove to the IRS that you made 5K..... say you did it buy mowing yards for cash..they would be happy you actually are showing your cash income...
 
Unfortunately, if you generate more than $400 from self-employement (or claim you made more than $400 from self-employment), you must file Schedule SE along with a Schedule C (or C-EZ) and the 1040.

So if you claim to have made $4000 while tutoring, you are required to report that income using your 1040 and Schedule SE (short version) and Schedule C-EZ, with the job code 8730 (teaching or tutoring)

and yes, while you may not have to pay federal taxes, you will end up having to pay medicare and social security taxes. For tax form yr 2006, if you claim $4000 in self-employment earnings, you will owe slightly above $565 in "self-employment taxes". Half of it can be used as a tax deduction, but since you wont owe any federal taxes, it wouldn't really help.

Also, keep in mind that since you won't have a 1099-MISC, there is no proof (in the eyes of the IRS) that you made only $4k and not $40k in cash. Your chances of being audited by the IRS just went up as compare to the average joe.

Now is $4565 worth it for a $4k Roth IRA contribution? That's up to you.

Some helpful links/forms to look at

http://www.irs.gov/pub/irs-pdf/f1040sce.pdf
http://www.irs.gov/pub/irs-pdf/f1040sse.pdf
 
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