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