Roth IRAs, Earned Income, and Stretch IRAs: Today’s Q&A Mailbag
By Sarah Brenner, JD
IRA Analyst
IRA Analyst
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Question:
Thank you for your very interesting monthly articles. I have the following Roth-related earned income question:
Have any clever retirees and/or tax advisors figured out exactly how to justify claiming that either “conventional” pension payments or RMD distributions can be treated as “earned income” for Roth IRA purposes? One possible justification is that the funds for either of those payments arose originally from “earned income” whose actual payment date was simply delayed in time. Is there any precedent for, or against, such a position? Recall that all of those delayed payments are fully taxable as income.
I’d like to justify and make annual Roth IRA contributions based on either of those premises. So I’d appreciate your comments. Thank you.
Sincerely,
Alan
Answer:
Hi Alan,
It is always good to think outside the box! However, when it comes to compensation for IRA contribution purposes, the tax code is very clear on what works and what does not work. For example, the tax code specifically excludes pension income from what is considered to be compensation in order to contribute to an IRA. This means it would take a law change for this to be possible. Any retirees who are interested in seeing this happen would need to persuade their Congressman to support legislation to get this done.
Many retirees who are still interested in making Roth IRA contributions solve the dilemma of not having compensation by taking part time jobs. Working just a few hours a week can provide the means to make Roth IRA contributions.
Question:
Hi,
I just read about your column in our newspaper. I have a question. Since I have no children and going to be 58 years old and know next to nothing about this stuff, can I make my niece a beneficiary and take advantage of this stretch IRA?
I do have an advisor. I don’t get much advice Thanks!!
Lisa
Answer:
Hi Lisa,
The answer to your question is a resounding “yes”! To get the stretch IRA, you simply need to name a living, breathing person on your IRA beneficiary form. There is no requirement that the beneficiary be a spouse or a child or even related to you at all.
You can name your niece on your IRA beneficiary form and after your death, she would be able to stretch distributions from the inherited IRA over her life expectancy. The result can be years of tax-deferred growth and significant tax savings for her.
Additionally, if you are unhappy with your current advisor, we have a list of financial advisors that are members of Ed Slott’s Elite IRA Advisor Group who train and study with us on a regular basis: https://irahelp.com/find-an-advisor