Roth qualifications based on earn income and stock income

[Guest andrewg]

I noticed a question on the board about investment income and the answers surprised me that if no earned income then regardless of investment income, one can contribute to a Roth.

Suppose now that my earned income qualifies for Roth contributions, but adding my investment income to earned income would exceed the Roth threshold, can I still contribute to a Roth? I thought this was a solid no - so why is it possible the answer to the first question is yes?

Confused

[BPickerCPA]

If there is no earned income then there can be no Roth contribution regardless of total income, unless the spouse has earned income and a joint return is filed. Even then the income limitations apply.

Even if there is earned income, the income limitation is based on TOTAL income.

Where did you see otherwise? It could be a typo.

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Barry Picker, CPA/PFS, CFP

New York, NY

[Guest andrewg]

I'm under the threshold for Roth contributions using earned income only, but I am way over the limit if I add my investment income. Now I'm pretty sure I don't qualify for a Roth, but the question posed by RichP and answer from John G suggests otherwise? any clarifications?

Thanks

[BPickerCPA]

John G has editted his answer. Recheck it and see if you're still confused.

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Barry Picker, CPA/PFS, CFP

New York, NY

[John G]

Barry, your cautionary note about the checking the knowledge of your professional is well observed. I am amazed that someone would do a six figure Roth conversion based upon something they read in Money or what a friend suggested. I have suggested getting two opinions on any major Roth/IRA action, but that still leaves the problem of "opinions from whom?" I agree that many accountants do not understand the details.

Barry, perhaps you can add some commentary what a lay person can do or questions to ask to ascertain the skills and experience of professionals.

Is retirement accounting/law a posted specialty?

[John G]

Actually, my original response said you must have earned income to create a Roth and that capital gains, dividends and interest did not count towards earned income. Neither the question (nor the original answer) addressed the max income threshold issue. The scenario was a retire women over 70 with only stock gains who want to have a Roth.

The earned income issue is distinct from the max income threshold. The max income threshold is based upon MAGI which is essentially the 1040 front page income, and includes salary, bonuses, interest, dividends and capital gains. Two different tests, two different methods of measuring income. Don't count on Congress to write a simple Roth law, and they needed a major technical corrections bill to fix some of the things they overlooked.

Please note it is extremely difficult to write a simple answer when there are so many parameters. It is also clear that it is very hard to cleanly write the question. Communications in the computer era, an ongoing concern!

Lets be clear on one point. Everyones circumstances are unique and the rules are complex. It is not uncommon to have very large assets involved. Each tax payer should seek professional assistance, and if mega assets are involved, two opinions may be desireable. A frequently cited maxim is "don't buy a house without and attorney", in IRAland the rule should be "consult your accountant or tax preparer before taking action".

[This message has been edited by John G (edited 03-31-2000).]

[BPickerCPA]

[[iRAland the rule should be "consult your accountant or tax preparer before taking action"]]

Unfortunately most accountants and tax preparers are not well versed in the IRA rules, so you have to check around to find someone that is. Just remember the dollars you're dealing with, compounded over time. Make sure the accountant knows what he/she is talking about, be very leery of what the custodian says, and for pete's sake ignore what your neighbor tells you her cousin's accountant told her!

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Barry Picker, CPA/PFS, CFP

New York, NY

[BPickerCPA]

[[barry, perhaps you can add some commentary what a lay person can do or questions to ask to ascertain the skills and experience of professionals.

Is retirement accounting/law a posted specialty? ]]

It's not a posted specialty. I added a section on this question in my guide, "IRAs at 70½". What I will do is excerpt it into an article that I will post on my web site, and come back and put a link in, if no one objects.

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Barry Picker, CPA/PFS, CFP

New York, NY