contributing to a traditional IRA with low income

[DBV1985]

Hello,

Is there a financial benefit in having a traditional IRA if you make less than 10K a year? My mom is 64 years old. She makes less than 10K a year and I was thinking of contributing my own earnings into her traditional IRA account. Of course, this would be after I have already contributed into my tax savings accounts. Max IRA contribution for 50 years or older is $6500. If my math is correct that would mean she wouldn't pay any taxes. My other question is does it matter where the money is coming from that goes into her traditional IRA? I don't want to break any laws here by transferring money from my bank account into her IRA. :) I just don't know if it makes financial sense to do this for her.

Thanks,
J

[braje]

What other income does she Have? Does she even have any Federal tax liability? I would probably do a Roth.

[terran]

With a total income of $10k chances are your Mom is already not paying any federal tax, so a traditional wouldn't be a good idea -- a roth could be though.

It doesn't matter where the actual money comes from as long as your mom has earned income (that's important, it can't be unearned like from investments) of at least what she contributes.

[jim555]

Put it in a Roth IRA not a Trad IRA.  Trad makes no sense if your bracket is low.

[MDM]

Put it in a Roth IRA not a Trad IRA.

Likely correct in this case.

Trad makes no sense if your bracket is low.

It's the marginal rate, not the bracket, that matters.  Those can be the same, but various credits (e.g., saver's and earned income) can cause some extremely high marginal saving's rates (particularly for 401k - IRAs not so much) in low brackets.

[financepatriot@gmail.com]

Yes, it's possible such a contribution will make her eligible for the "saver's tax credit."  However, with less than 10k, she should probably contribute to a Roth instead.  There is no real deduction at such a low income.  The Roth contributions also will trigger the saver's tax credit as well.

[Errol Flynn]

I was encouraging my low income friend to shoot for the Saver's Credit the other day so he could pocket all of his EIC, and it became apparent that parting with money until retirement is an unattractive option for someone making under 20k/year.

This got me thinking--is it legal to contribute to a Roth IRA for 2016, claim the Saver's Credit to wipe out your tax liability, and then withdraw your Roth contributions penalty and tax free after you receive your tax refund?

Or is there some required seasoning period that disallows an immediate withdrawal of your Roth contributions?

[MDM]

I was advocating for my low income friend to shoot for the Saver's Credit the other day so he could pocket all of his EIC and it became apparent that parting with money until retirement is an unattractive option for someone making under 20k/year.

This got me thinking--is it legal to contribute to a Roth IRA for 2016, claim the Saver's Credit to wipe out your tax liability, and then withdraw your Roth contributions penalty and tax free after you receive your tax refund?

Or is there some required seasoning period that disallows an immediate withdrawal of your Roth contributions?

Sort of.

You would have to wait until at least April 18 this year, and possibly Oct. 16, depending on the interpretation of "due date of your 2016 return (including extensions)" - see the instructions for Line 4 on 2016 Form 8880.

I don't know whether "including extensions" implies "that you have requested" or not.

Anyway, at worst you could withdraw your 2016 Roth contributions that were used for the 2016 saver's credit after Oct. 16, 2017 and pay no tax or penalty.  You would then, however, be prevented from using up to that withdrawn amount toward the saver's credit in your 2017, 2018, and 2019 returns.  Again, see line 4 of Form 8880.

[Errol Flynn]

I see. So, there's a 4 year look-back period that penalizes this sort of thing. Thanks, MDM!

[dandarc]

Anyway, at worst you could withdraw your 2016 Roth contributions that were used for the 2016 saver's credit after Oct. 16, 2017 and pay no tax or penalty.  You would then, however, be prevented from using up to that withdrawn amount toward the saver's credit in your 2017, 2018, and 2019 returns.  Again, see line 4 of Form 8880.

I can see it now - saver's credit Roth ladder.  $2K in 2017, $4K in 2018, $6K in 2019 and beyond.