The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Roth IRA & "earned income"||Date: 11/19/1998 7:27 PM|
|Author: TMFTaxes||Number: 6389 of 122300|
[[This year I opened a Roth IRA with $2000. The problem is, between being a full-time student
most of the year, and taking time off for travel and other stuff the rest of the year, it looks like I
won't have made $2000 in "earned income" by the end of the calendar year. I will have made
plenty in capital gains, but (as I understand it) I'm not allowed to contribute any of that to my IRA.]]
That's right...you've got to have earned income in order to make a Roth IRA contribution.
[[ What exactly is Uncle Sam going to do to me if I've contributed more to my IRA than I've made in
"earned income"? ]]
It depends upon what YOU do with the "excess contribution". If you do nothing, and simply leave it in there, you'll get hit for a 6% penalty tax on that contribution for each and every year that the "excess" contribution remains in the account.
[[To meet the "earned income" requirement, would I necessarily need to make that
money before Dec. 31, or is it possible to count income made in the first quarter of 99 as having
been earned in 98 for tax purposes? (This question isn't as weird as it sounds: I know that it would
have been possible to contribute money to a Roth IRA in 97, for tax purposes, anytime during the
first quarter of 98.)]]
The question isn't weird at all. In fact, it's pretty clear thinking. Sadly, that's not the way it works.
If you have an excess contribution in your Roth IRA, in order to avoid the 6% penalty, you must remove those excess contributions (and the associated earnings) prior to the due date of your tax return.
While you certainly could designate the excess contribution as part of your 1999 Roth IRA contribution, you would still get hit in 1998 for the 6% penalty on the excess contribution that took place for 1998.
So your best bet, if you know that you will not meet the earned income rules, is to get rid of the excess now (or be prepared to pay the penalty).
Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|