What determines the amount that I can add to my ROTH IRA each year?

[dizathome]

I want to know what determines how much I am allowed to add to my Roth IRA each year. I am retired and do not work during a year at a "steady job."  I sometimes do have a small income for a given year other than my retirement pension and my Social Security. I am now 70 yrs, 2 mo. old.  I told my investment advisor that, starting next year, I intend to withdraw the required amount from my traditional IRA and invest it into my ROTH IRA.  She said that I am only allowed to do that IF the amount does not exceed the amount of my income for the year.  Is this correct?  I thought it was allowable to add up to $5,000 a year to a ROTH IRA.  Will you please clarify this?

[ChristinaS · Accepted solution]

You need to have compensation income/ earned income for the year in order to contribution to a Roth IRA, on top of all the other general income requirements. While you don't need to have a steady job, you do need to have some W2 income and/ or self-employment income- at least as much as you plan on putting in to the Roth (up to $6500 since you are over 50). If you made a contribution of $5000, and your earned income was $3000, as an example, you would have to take the $2000 out or face a penalty. The allowable contribution is calculated when you file your tax return, so be careful if your earned income is close to the limit.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-li...

Retirement income, Social Security, dividends, interest, etc. cannot be used to meet the earned income requirements.

On top of needing some earned income, your total income needs to fall below the thresholds in the link below:

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017

[macuser_22]

However, if you file a joint return and your spouse has earned compensation then that earned income can be applied to both your spouses IRA and your IRA, but the total of both spouses contributions cannot exceed the total earned compensation.    

A RMD (Required Minimum Distribution) can never be rolled over, converted to a Roth or invested in any other tax deferred retirement account.  Only new contributions that come from earned compensation can be added to an IRA.

[dizathome]

Thank you.  Then, if my wife and I were to file jointly, and together we had income of more than $5000, am I correct that we could take out our RMD, pay taxes on it, deposit or spend the rest, and then put up to $5,000 dollars into either (or each) of our ROTH IRA's?

[macuser_22]

Yes, (and the limit is $6,500 not $5,000 since you are over age 50) as long as the income was earned compensation (money from working such as W-2 or net self-employed income minus the deductible part of the SE tax).

See IRS Pub 590A for more information.  "What Is Compensation?"
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230355">https://www.irs.gov/p...>

And "Kay Bailey Hutchison Spousal IRA Limit"
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230412">https://www.irs.gov/p...>

[dizathome]

Thank you!