ROTH Contribution Question

[JKCPA]

Hello,

If I were to have a w2 for 50k, and a schedule C loss of 55k, can I still contribute to a ROTH IRA?

I have FICA taxes paid on the W2 income, so I am thinking maybe that still constitutes earned income available - whereas the Sch. C loss never had FICA taxes taken from it.

Also, if you can provide where you found the information, I would appreciate that, so I can read up on it.

Thank you for your help!

[JulieS]

No, you can't contribute to a Roth based on the scenario you describe.

Even though you have some earned income (wages) to justify your contribution, you are also limited to no more than you Modified Adjusted Gross Income (MAGI), which in this scenario is negative ($5000). 

Click here to see the applicable IRS worksheet and additional information on this topic. 

[dmertz · Accepted solution]

The answer provided by JulieS is incorrect.  Your Roth IRA contribution is in no way limited to MAGI.  Yes, you can contribute to a Roth IRA.  The amount of compensation reported in box 1 of the W-2 supports a Roth IRA contribution regardless of any Schedule C loss.  Upon entering a Roth IRA contribution into TurboTax, TurboTax will not flag the Roth IRA contribution as an excess contribution (provided that your MAGI for the purpose is not so high that the amount that you are eligible to contribute to a Roth IRA is limited.

See IRS Pub 590-A page 6, "What is Compensation?" where it says that the amount in box 1 of your W-2 minus any amount in box 11 is supporting compensation.

[JKCPA]

I went through the MAGI worksheet, and it looks like that worksheet calculation is just to compare MAGI to the limits based on filing status? I did not read any AGI limitations based on the worksheet, just if it is under MAGI, then you are allowed.

[dmertz · Accepted solution]

@JKCPA , yes, that is what that worksheet is for.  There is no minimum MAGI that you must have to be eligible to contribute to a Roth IRA.  You could even have a negative MAGI and would still be eligible to contribute based on the amount in box 1 of your W-2.

[JKCPA]

Yeah, it seems it goes off of what you paid  SE/FICA taxes on - aka earned income. It seems if you were to have a -10,000 Sch C., pay 0 in FICA, then you couldn't due to having no "FICA" income.

Thank you for your help.

[JKCPA]

Thank you for your help.

[dmertz]

"it seems it goes off of what you paid  SE/FICA taxes on"

Not exactly, but that's a rough indicator.  For example, someone filing single and whose only compensation is less than $433 of net profit from self-employment does not pay any SE tax but can still make an IRA contribution.

[JKCPA]

Thank you for the info.

I have another question that I have been trying to figure out for the last 30 minutes.

I have a couple who are married. The info goes as follows: $17,800 W2, $772 IRA dist/1099-R, and $48,086 in Social Security ($5,321 becomes taxable after going through the worksheet).

So right now I have 17,800 in earned income, and about 23,900 in AGI.

I went to see what the AGI limits were for AGI EIC and it is $22,610 for MFJ, no kids.

I was trying to see if they were to put $2-3k into an IRA then what would happen with the EIC because AGI would drop below the limit. (note that the previous stated taxable SSI will be less after the 2-3k IRA goes in, but that probably doesn't matter because it seems to be limited/disallowed by something else.)

When I did this, followed the instructions and looked over the worksheet - the tax software does not fill box 5 when by my knowledge it should (see pic). The credit seems to look at the table for earned income, then for AGI, grab the amounts based on the table, then take the lessor if the 2 to give the credit.

I am wondering how I am being limted?

Thank you.

Here is the IRS link to the EIC table - first is the taxable income table then midway down is the EIC table:

https://www.irs.gov/instructions/i1040tt

[JKCPA]

Wow - I believe it is because he is >65 years old. I remembered the age>25 year old rule, but did not remember the upper limit.

Is that what it is?

[DanaB27]

Yes, you must be at least age 25 but under age 65 (at least one spouse must meet the age rule) to qualify for the Earned Income Credit. Please see What are the qualifications for the Earned Income Credit (EIC or EITC)? for additional information.

@JKCPA