IRA Question

[Guest jkriv03]

I have 3500 coming soon and I would like to put it into a Roth Ira either thru Vanguard or Fidelity. The thing is... I am a college student and this past year have not been employed. Can i put this 3500 into a Roth ira as my current balance and then pickup a job and begin to contribute to the IRA? I guess I am just wondering how I can get this into the Roth at this time so I can start drawing the interest. Is there any way I can do this? Thanks

[WDIK]

See Publication 590 (found here), starting at the bottom of page 53.

(Note that the link is a pdf file.)

[ERISAnut]

The $3500 you have coming to you must constitute earned income. Meaning, you cannot contribute an allowance you receive from your parents or a excess amount left over from financial aid to an IRA. It must be "income".

You may be able to contribute this amount based on the anticipation you will have at least $3,500 in income for 2006. If you end up contributing to the IRA; but do not end up with such income, then the amount in excess of your income will need to be withdrawn from the IRA by April 15th 2007.

Hope this helps.

[John G]

A point of clarification. There is no linkage between source of the funds you use to contribute to an IRA/Roth and eligibility. Eligibility is a seperate issue.

To be eligible, you must have "earned income" and meet the filing status and total income rules. "Earned income" is most often a paycheck from an employer, but includes self employment (newspaper route, house painting, etc.). Dividends, interest, gifts, financial aide, tax returns, etc. are not earned income. You don't have to accumulate the earned income before you contribute, but must log it before year end.

Contributions to an IRA/Roth can come from any source.... savings, gift from parents, tax return, monthly withdrawal from checking, etc.

You use an odd expression - "start drawing the interest". The normal procedure is to make a contribution to an IRA/Roth and have all earnings stay in the account and compound. "Interest" is typically the lowest form of return, associated with CDs and money market accounts. IRA/Roths are long term tax shelters where you should be looking at mutual funds that have a substantial equity (aka stock) component.

[Guest jkriv03]

Ok thanks Jon. So If you can be self employed and still contribute, and I am receivinng this from my parents arents there some ways to get around this? Not trying to be sneaky. But I mean couldnt it be a gift from my parents or income that I have earned from working for my parents? I mean couldnt I say that I worked for my parents? Ok just read it over again and think I understand more clearly. Earned income can not be a "gift" but I could still put the 3500 into an IRA as long as I have actually earned 3500 of income for 2006. Correct?

[ERISAnut]

Ok thanks Jon. So If you can be self employed and still contribute, and I am receivinng this from my parents arents there some ways to get around this? Not trying to be sneaky. But I mean couldnt it be a gift from my parents or income that I have earned from working for my parents? I mean couldnt I say that I worked for my parents? Ok just read it over again and think I understand more clearly. Earned income can not be a "gift" but I could still put the 3500 into an IRA as long as I have actually earned 3500 of income for 2006. Correct?

Earned Income is subject to FICA and FUTA of 12.4% and 2.9%, respectively, for self-employed individuals. Good luck trying to claim this as earned income.

[John G]

I don't see a workaround. If you are employed later this year, or already worked this year and your earned income will show up on your Federal 1040, then you can start a Roth. You can not start a Roth based upon a gift, lottery win, or other source of cash. It's all about "earned income". You may want to get a copy of IRS Publication 590.

Perhaps you will be employed in 2007. If so, you can start your Roth the first week of January 2007.