Roth IRA Contributions and Conversions Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

Tax time is drawing near, and as expected, we had several questions about IRA and Roth IRA contributions in this week’s Slott Report Mailbag. We answer those questions as well as a question on converting an IRA to a Roth IRA near retirement. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Ed,

I want to employ my father so he can contribute to a Roth IRA. He has earned income now, but he is looking to retire in the next few years and I want him to still be able to contribute to his Roth. I am not a business owner, but would I be able to pay him wages?

My father lives in PA and I live in HI. Since college I have stored all of my collectibles and personal items in the top level of the house. He maintains that area by cleaning and I would like to pay him for this work. Would this be considered legitimate work from the IRS standpoint?

I am looking for a starting point on how to employee him so he has earned income and can contribute, and then I would like to know how to begin the process of paying him. Do I need a payroll software system for withholding or do I pay him through a 1099 Misc?

Any advice would be great!

Thanks,
Brian

Answer:
You are correct that your father would have to have earned income to contribute to a Roth IRA. If you want to pay him for services you should consult your tax advisor on how that should be done and how it will be reported.

2.

Hi Ed,

I would like to know if an unemployed person could withdraw his/her 401(k) retirement money before the age of 59. I understand the person would have to pay the regular taxes plus an additional 10% penalty. We wonder if the IRS can wave the additional 10% penalty considering the fact that the only income for this year would be the 401(k) retirement money.

I look forward to receiving your information.

Thank you,

Ana Gust

Answer:
If the unemployed individual was age 55 years old when they left their job, distributions from the 401(k) plan will be subject to income tax only (on the pre-tax amounts distributed), but not be subject to the 10% early distribution penalty. Age 59 1/2 applies to distributions from IRAs. IRS does not have the authority to waive the 10% penalty. However, the tax code does have a number of exceptions to the penalty for things such as higher education expenses (for IRA distributions only) and for medical expenses. You can find a description of all of the exceptions in IRS Publication 590.

3.
I am 62, still working and earning under $50K/year. I have $100K in a traditional IRA. Should I convert to a Roth IRA with 5 years left to my retirement?

Thank you,

Leslie

Answer:
In general we favor Roth IRAs for many reasons. However, a Roth may not be advantageous for everyone. Right now, income tax rates are the lowest they have been in years. Doing a conversion now means you will not have to worry about tax rates on future distributions. But if you are going to need funds from the account shortly after converting, a Roth IRA might not be beneficial for you. Another consideration would be whether or not you have other, non-IRA, funds to pay any income taxes due on the conversion. To Roth or not would be a good discussion to have with your tax advisor.