Earned Income, ROTH IRA, and Traditional IRA

Submitted by Ram Iyer on Thu, 2022-12-15 21:51

Hello:

If I make a self-employment income of $8000 in 2022, and my spouse makes no income, how much can we contribute to ROTH IRA or Traditional IRA? Can I contribute $4000 to ROTH IRA/Traditional IRA, and can she also contribute $4000? Or only am I eligible to contribute $7000 to ROTH IRA/TRAD IRA? I am assuming dividend income, Traditional IRA distributions, $2000 yearly pension she has are not earned income.

Tax Software spits out only about $4600 as my contribution and I wonder why? If our joint taxable income is, for argument’s sake, is $250,000 because of ROTH Conversions and Traditional IRA distributions, will that take us out of our eligibility for ROTH IRA and Traditional IRA?

Thanks



Submitted by Alan - IRA critic on Thu, 2022-12-15 22:19

  • You can allocate your 8000 of earned income using spousal contributions in any combination between your IRAs except that neither account can receive more than 7000, and the total cannot exceed 8000.
  • The joint MAGI limit for Roth contributions is 208,000 for 2022, but Roth conversions do not count in determining MAGI for purposes of regular Roth contributions. Subtracting the conversion might have left you in the Roth phaseout range which is 198k-208k. If so, you could contribute 4600 to your Roth IRA and 3400 to spouse’s Roth IRA, or you could split the contributions between TIRA and Roth IRAs as long as you do not exceed the total of 8000 for all contributions or 4600 for any one Roth contribution. Any TIRA contribution made will be deductible assuming that neither of you participates in a workplace plan. All assumptions made are based on joint filing status.

Submitted by David Mertz on Thu, 2022-12-15 22:42

Also, if $8,000 is your net profit, that must be reduced by ½ of your self-employment tax to determine the net earnings available to support IRA contributions for you and your spouse.  That likely means a total of only $7,388 available to contribute.

Submitted by William Tuttle on Fri, 2022-12-16 03:44

  • If you already have a one-participant 401k plan, you could make a Roth 401k employee deferral without reducing IRA compensation.
  • If not, given the late date. It might be difficult to adopt a one-participant 401k plan and an make an employee deferral election by 12/31.
  • While you have until your tax filing deadline including extensions to make the deferral. You must meet this deadline to make employee deferrals for the tax year.

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