| Messed up! Roth IRA and K1s |
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wyclef
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| Messed up! Roth IRA and K1s |
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Hi, I screwed up. I set up a Roth IRA after extensive research and now it seems like I'm not allowed to have a Roth IRA. WHAT NOW?
I set up a Roth IRA last year with Vanguard and thought that I qualified to contribute however when filling out my taxes I was alerted that I had made an excess contribution because my earned income is zero. All of my income comes from a share of my business' income which is recorded on a K1. Am I not allowed to contribute to a Roth IRA? As a temporary measure I've switched my contributions from 2007 to 2008 to buy myself some more time to figure out what to do. I really want to set up a retirement plan but don't know what to do now.
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Tue Apr 15, 2008 2:42 pm |
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coaster
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There's something called a "recharacterization." I don't know much about it; perhaps someone who knows better than I will post. But this is from the IRS website:
quote:
Recharacterizations
You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.
To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.
Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount.
Report the recharacterization on your tax return for the year during which the contribution was made.
Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA.
~Tim~
Eye Candy : Why Whimsy
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Tue Apr 15, 2008 8:22 pm |
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pf101
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Are you married? If so, you can do a Roth if your combined income is under the limit.
Personal Finance 101
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Wed Apr 16, 2008 7:59 am |
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BlankenshipFP
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You must have "earned income" in order to contribute to a Roth IRA. If your K1 is structured such that you don't have earned income (subject to FICA/Self employment tax) then you can not contribute to a Roth IRA.
If you restructured your K1 reporting so that you show an income for 2008 you can leave that contribution in place for this year... and as PF101 has correctly pointed out, if you are married and file jointly, your combined wage income (with your spouse) is the measuring stick.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Apr 16, 2008 2:23 pm |
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wyclef
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i don't understand where on the K1 you would show an earned income other than the spot I designate my earned income... 'Ordinary business income' (Part III [Partners Share of Current Year Income... Box 1).
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Wed Apr 16, 2008 2:25 pm |
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BlankenshipFP
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Okay, let's back up then...
Not on your K1 - on your corporate return, where you show wages. There would be a corresponding wage earned on your (personal) side as well. (it might be characterized as owner draw, or distribution, etc.) This amount would need to be included as wages or schedule c earnings (not return of capital, not dividends) in order to be eligible for IRA contributions.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Apr 16, 2008 7:31 pm |
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wyclef
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so on form 1065 do you know where I would enter that info? I can't seem to find it.
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Wed Apr 16, 2008 9:47 pm |
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BlankenshipFP
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I don't have a 1065 in front of me - the bottom line is: did you pay yourself a salary? Did you have any income that was subject to SE tax? If not, then you can't make an IRA contribution. If you did have income subject to SE tax, then you can make an IRA contribution...
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Apr 17, 2008 12:14 pm |
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wyclef
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i see. what would you recommend for a retirement plan for someone not paying SE tax? Is there anything?
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Thu Apr 17, 2008 6:10 pm |
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BlankenshipFP
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There's a lot of variables - you can set up pension plans, deferred comp plans, plain annuities, life insurance-funded plans, etc.. You really need to either do some studying on the subject and/or get with an advisor to help you sort out the appropriate options.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Apr 17, 2008 6:52 pm |
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wyclef
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what instances would an LLC giving out K1s to partners not pay SE tax?
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Mon Jun 30, 2008 8:15 pm |
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BlankenshipFP
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If there is no net partnership income, or no net income (after expenses) to the partner, then no SE tax is payable.
In most cases if there is a K1 delivered to the partners there would be SE tax payable, and therefore there is opportunity to contribute to a retirement plan (of many choices of flavor).
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Mon Jun 30, 2008 8:24 pm |
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wyclef
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cool. i'm screwed. time to get a fifth job i guess.
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Mon Jun 30, 2008 8:42 pm |
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wyclef
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guess i'm living the american dream
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Mon Jun 30, 2008 8:56 pm |
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coaster
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quote:
Originally posted by wyclef
cool. i'm screwed. time to get a fifth job i guess.
No wonder the unemployment numbers aren't as bad as it seems they should be. 
~Tim~
Eye Candy : Why Whimsy
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Mon Jun 30, 2008 9:17 pm |
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