RMD dollars into an IRA?

[1tttennjack]

I turn 73 in 2024. I just took my RMD early in 2024. My wife and I are retired and our only income comes from a pension, social security, our stocks & banks accounts, and a small rental LLC (one condo that we rent). I do not believe any of this is earned income. Yet when I work through my 2023 taxes with TurboTax, I get to the “Federal Review’ section and indicate the neither my wife nor I are covered by a retirement plan at work (since we are retired). And Turbotax tells me that I can still reduce my taxes by contributing money (which in our case would be from my RMD) into our IRA.

The first question - is the LLC generating ‘earned income’ because I know the other income does not fall into the IRS’ definition of ‘earned income’? Can rental property generate earned income?

The second question - is it against the IRS’ rules to make an IRA (or HSA) contribution from my RMD since that is exactly what I would be doing? But the IRA contribution would be lower my taxes for 2023? I know they just view the RMD as taxable income but it just seems like the IRS would find something wrong with this.

Thanks       

[KrisD15]

It does not sound like you have any earned income to contribute to an IRA. 

Rental income does not qualify. 

How does the LLC report income to you?  If on K-1, in which box is the income reported?

[VolvoGirl]

It asks everyone that.  It doesn't know you are not qualified to make a contribution.  No you can't put your RMD into s IRA.  If you actually entered a contribution it would say it's an excess contribution.  

[1tttennjack]

Actually Turbotax tells me I can reduce my taxes by making a contribution. 

[VolvoGirl]

I know but that is at the end like an advertisement.  If you actually went to Deductions and entered a $6,500 IRA contribution it would give you a 6% penalty for it.  

[1tttennjack]

The LLC reports the income mainly as rental income - but there is a small amount that is reported as self-employment income (it actually comes from a car that we quit using and leased to somebody else for a short time). Could that be ‘earned income’? 

[VolvoGirl]

Yes, a Net Profit on Schedule C for self employment is earned income.  So you can make a IRA contribution.  

If you have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for the ER portion of your self-employment taxes. See IRS publication 590A (page 39 for ROTH) https://www.irs.gov/pub/irs-pdf/p590a.pdf

So check 1040 Schedule 1 line 14. You have to deduct that amount from your Schedule C Net Profit. That will give you the allowed contribution for the 1099Misc income.