Can I open a Roth IRA?

[Mark2365]

What is the name of your state? Arizona

I'm age 69, basically retired, only income is $800 monthly from Social Security.
Living expenses are basically zero.
I've got $26k available, saved from many years ago, mostly in Krugerands.
I want to open an IRA at an online brokerage, to invest in some stock options.
Research indicates a Roth IRA is better, to avoid Fed taxes, but
there are indications that the contribution must come from wages.
Am I allowed to open a Roth IRA? Please cite the relevant IRS rules.
I've never before had any IRA or retirement accounts.
Thanks.
Mark2365

 

[Just Blue]

@Taxing Matters

 

[Mark2365]

Say what?
Are you implying that my post is somehow against the rules?
OK, I just read thru the "Terms Of Service And Conditions Of Use Agreement" from
https://www.freeadvice.com/resources/conditionsnew.htm
Please do clarify what I did wrong there, Blue.
Mark2365

 

[adjusterjack]

You didn't do anything wrong. What Blue did was "tag" our fellow contributor, Taxing Matters, who is a tax attorney in DC and provides comprehensive answers to tax and other questions.

However, the simple answer is that a Roth IRA also requires contributions from earned income, or from a conversion from an existing IRA.

You can read all about it in IRS Publications 590-A and 590-B.

https://www.irs.gov/pub/irs-pdf/p590a.pdf

https://www.irs.gov/pub/irs-pdf/p590b.pdf

There is no reason that you can't open an investment account with a broker, either local brick and mortar broker or any of the popular online brokers which you can find by googling. You'll just have to pay income tax on the earnings unless you invest in tax free municipal bonds or some other tax favored investment.

I suspect that you will have to cash out your Krugerrands and deposit the money in the investment account. You may also have to pay income tax on any gain you realize from the sale of the Krugerrands.

 

[Taxing Matters]

Research indicates a Roth IRA is better, to avoid Fed taxes, but there are indications that the contribution must come from wages.

For you a Roth would be better because a deduction for an IRA contribution would do you little good, but the Roth distributions would not be taxable income to you. But in order to contribute to a Roth IRA in 2020 you will need to have taxable compensation. Compensation is described in IRS Publication 590-A as follows: "Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments." So if your only income in 2020 is from Social Security payments you are not eligible to contribute to a Roth IRA. IRS Publication 590-A discusses all the rules and limitations on Roth contributions starting on page 39. Note that the publication is for 2019 so the income limits described there will be a little bit higher for 2020 due to inflation adjustments.

 

[Taxing Matters]

You didn't do anything wrong. What Blue did was "tag" our fellow contributor, Taxing Matters, who is a tax attorney in DC and provides comprehensive answers to tax and other questions.

No longer in DC, moved from there a couple years ago.

 

[adjusterjack]

No longer in DC, moved from there a couple years ago.

To me, you'll always be Tax Agent from DC.

 

[Zigner]

Say what?
Are you implying that my post is somehow against the rules?
OK, I just read thru the "Terms Of Service And Conditions Of Use Agreement" from

The phrase "***Please, read the TOS if you haven't done so.***" is that adviser's signature line and appears on all of her posts. It's not directed at you (or anyone) specifically.

 

[Just Blue]

Say what?
Are you implying that my post is somehow against the rules?
OK, I just read thru the "Terms Of Service And Conditions Of Use Agreement" from
https://www.freeadvice.com/resources/conditionsnew.htm
Please do clarify what I did wrong there, Blue.
Mark2365

sigh...


My signature line is "Please read the TOS if you haven't done so." It is directed at everyone and no one in particular, I have that as a siggy because VERY FEW actually read the TOS of this site. As a "favor" to you in particular I tagged Taxing Matters who is a site vetted tax attorney.

I hope I have cleared that up for you Mark.

 

[Mark2365]

Got it, Blue. That's a standard statement in your sig. OK.

Thanks for the replies, people.

AdjusterJack, ANY contribution to a ROTH IRA MUST be from CURRENT Year income (or some other IRA)?
The thing is,. . . I Don't Want to pay Fed taxes.
AND, I want to invest in Options, not tax-free muni bonds.

EXACTLY, TaxingMatters, current Deductions are worthless to me (for a Regular IRA),
AND ROTH distributions are Not taxable. THAT's what I'd like to do.
I read thru 590A, page 39 (and Several pages after that), and it DOES NOT say that the "Compensation" MUST be in the CURRENT year.
I've got All previous tax returns, showing there was income, and no IRA contributions. Might that be of any help?
Re: Contribution limit: I want to contribute only $5k, anyway.
Is There ANY WAY in which I can open a Roth IRA?
Thanks very much for your time and expertise.
Mark2365

 

[adjusterjack]

Actually, if you had qualified earnings in 2019 you could open up a Roth with a contribution specifying that it was for 2019. $5000 would be well within the 2019 limit of $7000 for those who were over 50, assuming you had $5000 in earnings in 2019.

According to the IRS website the deadline for making that contribution for 2019 (ordinarily April 15, 2020) has been extended to July 15, 2020.

https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers#iras

Note, however, that the question applies to IRAs and doesn't mention Roth IRAs. Let's wait until Taxing Matters comes back to weigh in on the question of Roth IRAs being included in the extention.

 

[Taxing Matters]

I read thru 590A, page 39 (and Several pages after that), and it DOES NOT say that the "Compensation" MUST be in the CURRENT year.

Although not expressly stated in the publication, I think it is fairly implied by the way it was written. In any event, the actual tax code makes that quite clear. The language used in the code for taxable compensation limitation states that your contribution for any tax year "...shall not exceed the lesser of othe following:
(A) the deductible amount, or
(B) an amount equal to the the compensation includible in the individual's gross income for such taxable year."
Internal Revenue Code (IRC) § 219(b) (underlining added).

IRC § 219 provides for the deduction allowed to contributions to regular IRAs and subsection (b) defines the limit for the deduction allowed for the year. The reason that this limit in § 219 matters for a Roth IRA is that IRC § 408A, which provides for the rules for Roth IRAs, defines the IRA contribution limits by referring to the limit for deductions to regular IRAs. See IRC § 408(c)(2). Congress did it that way to coordinate the rules for contributions for both regular and Roth IRAs. That "deductible amount" in (A) is $6,000 for 2020; that's where the $6,000 part of the limit rules for Roth comes from.

The bottom line therefore is that to contribute to a Roth IRA for 2020 you need to have taxable compensation in 2020 that is at least equal to the amount you wish to contribute to the Roth. So if you want to contribute $5,000 to a Roth for this year you need at least $5,000 in taxable compensation earned this year. If you have no taxable compensation the year you want to contribute to the Roth then you cannot contribute to a Roth for that year.

The thing is,. . . I Don't Want to pay Fed taxes.
AND, I want to invest in Options, not tax-free muni bonds.

If your only income now is $800/month from Social Security and you want to contribute $5,000 to the Roth I don't see where you'd have much worry here of having enough income to have to pay tax if you invested that $5,000 in some regular investment. How much income other than your Social Security do you think you will have each year if you put this money into something other than a Roth? Are there a bunch of investments you'll have providing income in future years that you aren't getting now?

 

[Taxing Matters]

Note, however, that the question applies to IRAs and doesn't mention Roth IRAs. Let's wait until Taxing Matters comes back to weigh in on the question of Roth IRAs being included in the extention.

It's the same rule for both Regular and Roth IRAs. A contribution for 2019 Roth IRA can be made as late as July 15, 2020. But of course the taxpayer must meet the contribution limits for 2019, including the requirement that the taxpayer had sufficient taxable compensation in 2019.

 

[LdiJ]

What is the name of your state? Arizona

I'm age 69, basically retired, only income is $800 monthly from Social Security.
Living expenses are basically zero.
I've got $26k available, saved from many years ago, mostly in Krugerands.
I want to open an IRA at an online brokerage, to invest in some stock options.
Research indicates a Roth IRA is better, to avoid Fed taxes, but
there are indications that the contribution must come from wages.
Am I allowed to open a Roth IRA? Please cite the relevant IRS rules.
I've never before had any IRA or retirement accounts.
Thanks.
Mark2365

Why do you want to open an IRA? If your only income is Social Security you really don't have to worry about paying any taxes on investments worth 26k. Even if your investments do fabulously well, its unlikely that your capital gains or interest would top your standard deduction.

 

[adjusterjack]

I should have thought of that.

The standard deduction for a person over age 65 is $13,850. Without any other taxable income one can earn up to that amount without paying any tax on it.