IHSS W-2 income is exempt from tax, making Roth IRA contribution excess contribution.

[websquaw]

IHSS W-2 Wages are now reported in miscellaneous income (IRA Notice 2014-7), not taxable W-2 wages. Because IHSS wages are not reported as taxable W-2 income, my Roth IRA contribution becomes 'excess contributions.' Is this correct? As was done with IHSS wages, is there a work around for this?

[RichardG]

Under IRS Notice 2014-7, certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program are difficulty of care payments excludable from income under § 131 of the Internal Revenue Code.

The IRS rules that define compensation for purposes of the Roth IRA deduction exclude "Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs."  Since you can exclude the payment from income, the income cannot be counted for purposes of calculating your Roth IRA contribution.

You should withdraw the excess contribution before the April 18 filing deadline to avoid the penalty for excess contributons.  Please follow this link for more information.  https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230873

[websquaw]

Answer works for 2016 tax return. However, amending 2015 tax return in 2017 with excludable IHSS income, creates another problem with excess Roth IRA contribution, in that it is beyond the April 15th 2016 deadline to withdraw excess contributions. Should the 6% penalty be paid for 2015, then for the 2016 tax return report the 2015 excess contribution withdrawn?

[RichardG]

There may be a way around your situation.  According to the IRS: "If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.  Under this rule, you can apply your excess 2015 contribution to 2016 without penalty.  So recalculate your maximum 2016 contribution,  then withdraw enough of your 2016 contribution to bring yourself within the limit, taking into account the excess from 2015.

[websquaw]

Yes this works.

[affirma]

Hello. Any update to this topic? In light of the Security Act 

https://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/qualifying-income-for-i...

beginning in 2020. Would an income from IHSS of under $30,000 in 2021 now qualified as earned income and makes a contribution of $6000 to Roth IRA NOT an excess any more (assuming no other earned income)?

[marshawang]

Yes, you can still contribute to a Roth IRA even if you receive In-Home Supportive Services (IHSS) payments that are excluded from your income, thanks to the SECURE Act of 2019. Here's why:

1. SECURE Act: This legislation explicitly allows individuals to treat excludable difficulty-of-care payments, like IHSS payments, as earned income for the purposes of calculating their Roth IRA contribution limits. This means those payments can count towards your income for determining how much you can contribute to a Roth IRA.

2. Income exclusion: While the IHSS payments are excluded from your taxable income, they still count as earned income for Roth IRA purposes thanks to the SECURE Act. This allows you to leverage that income for potential retirement savings.

3. Limits still apply: Remember, there are still income limits for Roth IRA contributions. In 2023, the maximum contribution is $6,000 for individuals under 50 and $7,000 for those 50 or older. If your adjusted gross income (AGI), including the excludable IHSS payments, exceeds the relevant limit, you cannot contribute to a Roth IRA

[marshawang]

Yes, you can still contribute to a Roth IRA even if you receive In-Home Supportive Services (IHSS) payments that are excluded from your income, thanks to the SECURE Act of 2019. Here's why:

1. SECURE Act: This legislation explicitly allows individuals to treat excludable difficulty-of-care payments, like IHSS payments, as earned income for the purposes of calculating their Roth IRA contribution limits. This means those payments can count towards your income for determining how much you can contribute to a Roth IRA.

2. Income exclusion: While the IHSS payments are excluded from your taxable income, they still count as earned income for Roth IRA purposes thanks to the SECURE Act. This allows you to leverage that income for potential retirement savings.

3. Limits still apply: Remember, there are still income limits for Roth IRA contributions. In 2023, the maximum contribution is $6,000 for individuals under 50 and $7,000 for those 50 or older. If your adjusted gross income (AGI), including the excludable IHSS payments, exceeds the relevant limit, you cannot contribute to a Roth IRA

[marshawang]

https://www.cdss.ca.gov/inforesources/ihss/live-in-provider-self-certification#:~:text=If%20you%20re....

it says "If you received income from the In-Home Support Services (IHSS) program for providing care to someone you live with, you have the option to include or exclude all or none of that income as earned income on your tax return. This may allow you to qualify for CalEITC and other tax credits."

[marshawang]

https://www.cdss.ca.gov/inforesources/ihss/live-in-provider-self-certification#:~:text=If%20you%20re....

it says "If you received income from the In-Home Support Services (IHSS) program for providing care to someone you live with, you have the option to include or exclude all or none of that income as earned income on your tax return. This may allow you to qualify for CalEITC and other tax credits."

[Vinyl Disc Man]

I believe one can only contribute to a non-deductible Traditional IRA not a Roth IRA. 

[DawnC]

It is a combined total.  For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• $6,500 ($7,500 if you're age 50 or older), or
• If less, your taxable compensation for the year

@Vinyl Disc Man 

[Vinyl Disc Man]

I want to clarify that I am only commenting on when a person solely has income from IHSS income and no other taxable compensation. Code section 408(o)(5) added by the Secure Act states contributions can be made to Traditional Non-Deductible IRA’s only. One can’t make a contribution to a Roth IRA based solely on IHSS income since no federal tax has been paid on this income. 

[marshawang]

This is the code that  you based on?  Please elaborate how this saying  that IHSS income with  Medicaid Waiver not eligible for Roth Contribution?  Thank you.

 I.R.C. § 408(o)(5) Special Rule For Difficulty Of Care Payments Excluded From Gross Income — 

In the case of an individual who for a taxable year excludes from gross income under section 131 a qualified foster care payment which is a difficulty of care payment, if—

I.R.C. § 408(o)(5)(A) — 

the deductible amount in effect for the taxable year under section 219(b), exceeds

I.R.C. § 408(o)(5)(B) — 

the amount of compensation includible in the individual's gross income for the taxable year,

the individual may elect to increase the nondeductible limit under paragraph (2) for the taxable year by an amount equal to the lesser of such excess or the amount so excluded.

[Vinyl Disc Man]

In IRS notice 2020-68 the IRS provides additional guidance. I am basing my example for when a person solely has IHSS income. In order to make a Roth contribution one must have taxable income. IHSS is the same as difficulty of care income and is not taxed on the federal level. Therefore this income is ineligable for a ROTH contribution because the income has never been federally taxed. A ROTH contribution must be federally taxed. Therefore, IHSS income is solely eligible for a non-deductible Traditional IRA contribution so that when distributions begin in retirement the contribution and any proceeds become federally taxable.