IHSS nontaxable income eligible for income for Roth IRA?

[rinke222]

Is income earned from IHSS and not taxed eligible to be used as income for Roth IRA purposes?

[PaulD CPA]

Hi Rinke,

Yes, In-Home Supportive Services (IHSS) workers are allowed to treat excludable difficulty-of-care payments as earned income for purposes of Roth IRA contributions. Here's a post that details the steps to provide TurboTax the information necessary to properly calculate that:  IHSS income and IRA'S

[rulesareconfusing]

Hello, my understanding is that following Section 116 of the SECURE Act of 2019, excludable difficulty of care payments are treated as compensation for the purposes of determining IRA contribution limits. However, IRS Pub. 590-A does not talk about this as compensation and only mentions it under the nondeductible contributions section of the traditional IRAs chapter in relation to increasing the nondeductible IRA contribution limit. Roth IRAs are supposed to have the same rules as Traditional IRAs unless noted, so I assume this also applies to Roth IRAs.

Some tax professionals and IRS employees say that IRS Pub. 590-A makes it clear that this only applies to nondeductible contributions to traditional IRAs, not Roth IRAs. They say that Roth IRAs requires taxable compensation, and the difficulty of care payments section does not apply to Roth IRAs. This all sounds very counterintuitive.

I was hoping you could provide some clarity. Thank you!

[DaveF1006]

Yes, this may seem confusing but it is clear from Pub 590 that Roth IRA contributions must be from taxable income. Since IHSS is non-taxable income, it does not qualify for Roth contribution purposes.

[rulesareconfusing]

Thanks for your input, but I don't see how it is clear. There are exceptions noted like nontaxable combat pay. Traditional IRAs also have the same language surrounding taxable compensation. Publication 590-A says, "You can open and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year." Yet, difficulty of care payments count for nondeductible contributions towards them.

Publication 590-A says, "you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA". It also says, "A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA". With regard to compensation, it says, "Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later)", and the compensation section points back to chapter 1 ("For more information, see What Is Compensation under Who Can Open a Traditional IRA? in chapter 1.").

Again, Section 116 of the SECURE Act was supposed to treat difficulty of care payments as compensation ("SEC. 116. Treating excluded difficulty of care payments as compensation for determining retirement contribution limitations. "). Perhaps the way it was enacted did not do so for Roth IRAs.

In my opinion, it is not clear that Roth IRAs are treated differently from Traditional IRAs in this regard, and the IRS should make this clearer. However, for now, it seems it would be best not to assume they also count for Roth IRAs.

@DaveF1006 @PaulD CPA 

[DaveF1006]

Yes, publication 590 does say that IHSS payments can counted as compensation toward a non-deductible IRA contribution. This is the listed in the Traditional IRA section of Publication 590. 

However, the language is very clear that Roth contributions must be made from taxable compensation.  Without a clear guideline that suggests otherwise, we must assume that IHSS payments do not count as taxable compensation for a Roth contribution.  When  a position isn't clear, it's best to err on the side of caution.

@rulesareconfusing 

[rulesareconfusing]

Actually, it is not listed as compensation in Pub. 590-A, it is instead mentioned as being used to "increase the amount of nondeductible IRA contributions" under the Nondeductible Contributions section. If it were listed as compensation, I think it would undoubtedly also count for Roth IRAs unless otherwise stated.

I could not find a different requirement for taxable compensation for Roth IRAs in Pub 590-A compared to what is written about traditional IRAs. Also, nontaxable combat pay is an exception for both.

Again, I agree, one should err on the side of caution.

@DaveF1006