Eligibilibty for Roth contribution and for conversion of Regular IRA to Roth

[Guest Rond]

I'm 62, have been retired since May 2006 retired, am living with wife and two kids on my pension and occasional freelance work, total income was way below the low-side threshold for Roth contributions. In March of 2008, I made a 2007 Regular-IRA contribution and a 2008 Roth contribution. Since I didn't hold a full-time job, though, was I even eligible for the Roth contribution? For Tax Year 2009, if I don't have any income other than my pension or if freelance income is less than the $6000 max Roth contribution, am I eligible for making any Roth contribution?

Two more questions, please:

1) As part of my 2007 tax declaration I forgot to file the Form 8606 for non-deductible IRAs. Am I right to think that since ALL my Regular- and Roth-IRA contributions have ALWAYS been NON-deductible, the oversight doesn't really have tax consequences, so that I can just file an updated Form 8606 with my upcoming 2008 tax declaration to record the 2007 Regular-IRA contribution and, on a separate Form 8606, show my 2008 Roth-IRA contribution??

2) I was SO depressed last year about my stupid investing, I never even THOUGHT about paying to convert my Regular IRA into a Roth. Now, the nearly-all-eggs-in-one stock I have in my Regular IRA seems to be headed out of deep red into green after all, so now I'm kicking myself for failure-to-convert stupidity! My income hasn't changed and won't, so can I convert NOW, even though it'll cost more because the stock has gone up???

Thank you very much in advance for helping me out!

[John G]

Partial answers:

Qualifications to make a Roth contribution is based upon "earned income" which for most people means a paycheck. Part-time or full-time status is irrelevant. Some kinds of self employed income may qualify. You can contribute the lesser of the maximum contribution allowed for that year OR your earned income. Even if you have zero earned income, you can make contributions based upon your spouses earned income. Earned income does not include interest, capital gains, dividends, gifts, and inheritances. You do not have to fund a Roth at the max amount, if you have 4K in earned income you could decided to contribute any amount up to 4K.

Note, your children can qualify for a Roth based upon part-time work such as newspaper routes and summer jobs. There is no minimum age rules that govern when a child can have a Roth. Some custodians don't want to handle child Roths, but that's a different issue and I digress.....

Don't think of conversions as some magical event that always works in your favor. You have to run the numbers based upon many scenarios. If you have a year with very low income, you might be able to do a Roth conversion and pay very little tax. You provided no information about your current tax bracket or the amount of funds involved. While you can post again and get some feedback, I highly recommend that if significant funds are involved that you talk to your accountant or tax advisor who knows more about you circumstances.

The accountants here can respond about tax forms.

[Guest Rond]

Thanks for your insights, John! The "earned income" requirement really sticks in my craw (though I know my views matter zilch): The pension I'm getting, after all, I most certainly had to EARN and it's outrageous, IMHO, that they're calling those payments, in effect, "unearned" income!!! That requirement does apply to Regular-IRA contributions, too, I guess....by the same rotten logic?

Partial answers:

Qualifications to make a Roth contribution is based upon "earned income" which for most people means a paycheck. Part-time or full-time status is irrelevant. Some kinds of self employed income may qualify. You can contribute the lesser of the maximum contribution allowed for that year OR your earned income. Even if you have zero earned income, you can make contributions based upon your spouses earned income. Earned income does not include interest, capital gains, dividends, gifts, and inheritances. You do not have to fund a Roth at the max amount, if you have 4K in earned income you could decided to contribute any amount up to 4K.

Note, your children can qualify for a Roth based upon part-time work such as newspaper routes and summer jobs. There is no minimum age rules that govern when a child can have a Roth. Some custodians don't want to handle child Roths, but that's a different issue and I digress.....

Don't think of conversions as some magical event that always works in your favor. You have to run the numbers based upon many scenarios. If you have a year with very low income, you might be able to do a Roth conversion and pay very little tax. You provided no information about your current tax bracket or the amount of funds involved. While you can post again and get some feedback, I highly recommend that if significant funds are involved that you talk to your accountant or tax advisor who knows more about you circumstances.

The accountants here can respond about tax forms.

[John G]

Nothing really rotten or insulting, "earned income" is just tax jargon for income related to wages and some kinds of self employment.

I find it unfortunate that the IRS code (which is a work of Congress) has a lot of stange distinctions... social security, interest, dividends, capital gains, gifts (a function of size), hedge fund income, long term vs short term, foreign vs domestic, military vs non..... to name just a few. You could start a whole new list for variations in how deductions and exemptions are handled: medical, primary vs secondary home, charitable, taxes paid locally, etc. Hey and lets not forget the business world: per-diam treatment, distinctions by class/weight of vehicle, variations in write-down schedules as a function of what kind of equipment, etc.

No legislative/accountant version of George Patton has emerged to do much to simplify the tax code. But, I digress and rant on the issue of tax simplification (which is not the same as being in favor of a flat tax).

Roth and regular IRA have the same criteria concerning income that can be used to justify contributions.

PS: Unemployment payments also don't count as earned income.

[K2retire]

Thanks for your insights, John! The "earned income" requirement really sticks in my craw (though I know my views matter zilch): The pension I'm getting, after all, I most certainly had to EARN and it's outrageous, IMHO, that they're calling those payments, in effect, "unearned" income!!! That requirement does apply to Regular-IRA contributions, too, I guess....by the same rotten logic?

Does it help to think of it as a requirement for current year work related income? That is essentially how they define "earned income" for this purpose.