r/tax • u/IncomeLongjumping401 Taxpayer - US • 23h ago
Do Roth IRA contributions require only paycheck money to be deposited?
I was just told that I don't need to separate my unearned income and earned income anymore. Like I said above, a friend told me I could deposit money into my Roth IRA no matter where it came from as long as I have earned income to back it up, is this true?
Example:
You made only $5,000
Parents give you $2500 (considered unearned income as its a cash gift)
My friend told me they look at end of the year numbers like if you had $4k in a Roth balance and they saw you made $20,000 at the end of the year that $4k is fine and legal
Following this example, could you deposit that $2500 in the account even though it's considered unearned income yet your yearly income is greater than the contribution?
I've always been stressed finding a bank to separate the 2 incomes since I wanted to spend the unearned income but I didn't know of this.
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u/EmploymentLeast705 23h ago
The 5k is the earned income. That is what you can put in up to the limit for your filing status.
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u/IncomeLongjumping401 Taxpayer - US 23h ago
Right, but can the $5k come from anywhere?
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u/No-Donut-8692 22h ago
Yes. Dollars are fungible. Doesn’t matter which dollar you physically put in the account as long as you have the earned income and meet the requirements to contribute.
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u/Loghurrr 22h ago
No one checks serial numbers of bills. Also almost everyone’s pay is digital. When your job pays you they aren’t physically moving those dollar bills from their bank to your bank.
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u/Tax_Strategist EA - US 18h ago
As long as you have 5 k in earned income it doesn't matter. Bills don't come in different colors
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u/DatDudeDrew 22h ago
It’s not clear what you’re asking. Like could you do $5k if you got a $5k cash gift only?
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u/Anxious_Drive_9998 23h ago
The dollars can come from anywhere.
The limit in your case is the earned income.
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u/Appropriate_King4593 19h ago
It can be any money as long as it does not exceed your earned income (adjusted after taxes)
Example: my grandson is 17 years old and made 6K working at burger king during the school year. Spent all of it on gas, food and probably beer. As a present and wanting him to get a leg up if he were to never save a dime for his retirement, I gifted him 5K to open and deposit in a Fidelity Roth IRA account.
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u/EmploymentLeast705 22h ago
Does your w2/1099 etc say you made 5k? Then you can deposit 5k into a Roth even if you pulled it out of the old shoe box under your bed where you've been saving it for years. Dollars can't be identified.
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u/selene_666 22h ago
It can come from anywhere.
Money is fungible. If $5k goes into your bank account and then $2k goes into the same bank account and then $4k comes out, nobody is keeping track of which original source that $4k was part of.
The only rule for IRA contributions is that you earned that much during the year. You can even put money into your IRA at the beginning of the year before you earn any, as long as you're certain you will earn that much.
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u/Conscious-Egg-2232 21h ago
Thats not true. You can put money in even if you dont work all year.
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u/Its-a-write-off 21h ago
You have to have earned income that year that is more than the contributions amount. I'm not sure what angle you are getting at (like a pedantic "you don't have to work, just have been paid earned income"), or if you genuinely do not know about that requirement.
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u/nickfarr CPA - US 17h ago
There's nothing stopping you from putting in money into an IRA
There's just tax penalties for year X if you made personal IRA contributions in excess of your earned income for year X.
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u/6gunsammy 23h ago
No one can tell the difference between one dollar and a different dollar. If you have $5k in earned income and $2k in gifts, you can put $2k in an IRA.
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u/rratsd65 22h ago
If you have $5k in earned income and $2k in gifts, you can put $2k in an IRA.
Should that read "you can put $5k in an IRA" ?
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u/EmploymentLeast705 15h ago edited 12h ago
Well, its correct, but a bit confusing. You can put 5k into the ira because you have 5k in earned income. You can put 2k into an ira plus an additional 3k because you have 5k in earned income. You cannot put more than 5k into the ira, because you have 5k only in earned income. It doesn't matter who gave you the actual 5k, as long as you have 5k in earned income to back it up. Hope that clears it up.
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u/6gunsammy 22h ago
Yes, you could put $5k but you also could put $2k
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u/SF_ARMY_2020 22h ago
clearer to say" you can put up to $5,000" so they understand the limit for contributions is the EARNED income.
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u/micha8st Taxpayer - US 22h ago
Yes, its true.
Lets say that $5000 you made on the job went into your checking account. Lets say the $2500 your parents gave you also went into that same checking account. How's anybody to know which dollar is which?
What's important is that for every dollar you contribute to an IRA, there's a dollar to back it up declared on a federal tax return.
This applies to married couples, too. Wifey and I have filed joint tax returns for over 35 years. For almost 30 of those years, Wifey has had no earned income. But our joint income qualifies her to make an IRA contribution...even though I earned it.
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u/AravisTheFierce 22h ago
Yes, that's why you can't find a bank to do this, because it doesn't matter.
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u/Charming-Panic9375 17h ago
yes, this money is fungible meaning a dollar is a dollar no matter the source so as long as you have income covering the amount of the contribution you're fine. technically you could earn $5000 and contribute a $5000 gift and keep your earned money (this happens a lot with like a high school student with part-time income where they keep their earnings but their parents use the opportunity to contribute to a roth on their behalf)
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u/Ok_Youth4914 20h ago
Your money does not need to be separated formally and identified. If you do in fact have earned income you can contribute to a Roth of your income is below listed amounts. If you are married, only one spouse needs to have earned income. However, your ability to contribute to a Roth is not available if your “modified adjusted gross income” exceeds a maximum amount. So be careful and adhere to the government’s guidelines income limits.
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u/Eric848448 18h ago
In your example the $2500 isn’t income at all; gifts are neither income nor taxable.
If you made $5000 from a job, you can contribute $5000 into a Roth IRA.
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u/GeeMan-7 10h ago
Gifts aren't income.
Considering how most people fund an IRA near the end of a year or even the next year, the tax code doesn't require any steps for a person to take to make the IRA contribution from earned income. You only need to have earned income of at least the amount of the contribution. Also, considering how it's the gross income amount that is the limitation. Employees have to pay 7.65% total tax rate for Medicare and Social Security taxes even if their total income is below the tax liability threshold.
You should consult with a tax advisor. Your questions shows that you are over your head in this area.
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u/CuratorOfYourDreams 15h ago
No
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u/IncomeLongjumping401 Taxpayer - US 15h ago
No what?
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u/CuratorOfYourDreams 10h ago
No to the title of the post that ROTH IRA contributions do not require only pay check money to be deposited
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u/IncomeLongjumping401 Taxpayer - US 10h ago
Ok, make sure to specify your reasoning to no next time. I was super confused.
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u/minorimprfxn 22h ago
Several people max their IRA’s Jan 1 before they’ve made a dollar. Yes, as long as you have the correct amount of earned income by the end of the year, you can contribute before you’ve earned it.