Remove ROTH IRA penalty

[ernie1]

I entered my personal information - including contributions to my ROTH IRA - and got hit with a penalty because I didn't have any "earned income".

I then entered my business income (my only income) on the business tab, but the penalty will not go away. Is business income not allowed for ROTH IRA contributions?

[MichaelL1]

Do you have a profit on the business?

[ernie1]

Net loss this year.

[ernie1]

Schedule C business

[MichaelL1]

The Sch C is earned income on the net profit.

A loss will not work for doing an IRA if that is only earned income.

[ernie1]

That doesn't seem right - I only have business income. It exceeds what I contributed to my Roth IRA. After entering business expenses this year, I have a net loss. So the IRS makes it worse by adding a penalty for contributing to my Roth IRA? Am I supposed to know before I make my monthly contributions to my ROTH that at the end of that year I'm going to end up with a net loss?

[MichaelL1]

You actually can make IRA contributions for 2018 tax year up to due date of 4-15-2019.

[ernie1]

Here's the COMPLETE answer: To avoid the 6% penalty on the amount contributed  (any amount contributed is considered "excess" if you didn't have any net income) take a distribution of the full amount for that year + gains (interest, dividends, appreciation, etc.) if any. The gains will then be subject to the 10% penalty if you're under 59-1/2 (or whatever other exception may apply in your case. None apply in my case, and I did not invest any of my 2018 contributions because they were too small - I just earned simple interest.

So I called my brokerage and completed a form to transfer the 2018 cash contributions + the interest to my primary brokerage account.

It may be possible to recharacterize all the 2018 contributions as 2019 contributions, but I'm not so sure that would work - if you had a lot of capital gains or dividends, then that might be something you'd want to try.

In TurboTax, I indicated that I took the distribution so that TurboTax can properly attach a statement explaining the reason for the early distribution (at least I HOPE that's what TurboTax will do).

90 minutes on hold and transferred around with the IRS and 45 minutes making sure I completed the right form with my brokerage got me to the above answer, and the penalty is now removed from my TurboTax return.

I hope this helps other people 🙂