Author Topic: How to contribute to retirement when you live the entire year off passive income  (Read 716 times)

retiremesoon

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This year, my only income was passive distributions from the company I started.

I sold a small percentage of that company for 38k, and I did 3-5k in consulting.

I wrote a book this year! www.dereksnook.selz.com called "The Definition of Success: What Living Homeless Taught Me" about the year I voluntarily lived homeless and how I learned to redefine success.

Here's my question. Can I contribute to retirement in any way? As an entrepreneur I like to contribute to an IRA Roth and Simple as much as I can because they are protected from bankruptcy up to one million (hope that never happens, but if it did). But I'm having a hard time from my accountant and financial advisor finding a way to put money into them w/out a regular income from a job I'm working. Since I wrote a book this year, I don't have that. Help?


lhamo

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If you don't have earned income you can't contribute to IRAs.  But this might be a good year to do a Roth conversion from your taxable retirement accounts.   
Wherever you go, there you are

retiremesoon

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Wait, I have 60k or so in a taxable account. Are you saying I could convert some of that into an IRA Roth or Simple IRA? That would work just as well and then I could refill my taxable account.


msheldon

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You can take money in a Traditional IRA and convert that to a Roth IRA. You will owe taxes on any "gains" you have in the TIRA, but pay taxes at this year's rate. If your passive income is low enough, you'll be in the 0% bracket and or no tax. Just make sure you don't convert too much Traditional IRA to a Roth IRA, or you'll bump yourself up a bracket and owe tax. (The gains you convert contribute to your "income" and can push you up a bracket on the long term capital gains rate.) The 0% bracket applied when your after-deductions income is below 37950/75900 (https://en.m.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States).

While this doesn't add more current dollars to your retirement accounts, it does increase your retirement after-tax dollars. And you spend after-tax dollars, so this is a good option if you have it!

retiremesoon

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okay great and thanks. This makes sense and I'll def do the roll over if possible!

MJseast

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Wouldn't the consulting work at least count as earned income? Will you receive a 1099 for it?

MDM

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Wouldn't the consulting work at least count as earned income? Will you receive a 1099 for it?
+1

Also, was there any revenue from book sales, and is that being reported on a Schedule C?

E.g., see Royalty income acceptable for IRA/SEP compensation?.

facepalm

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You can contribute to your retirement--it just may not end up being tax advantaged. You can still contribute to your brokerage account and buy investments that avoid dividends, (as much as possible).

Jessica J. Babbitt

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This is a very useful thread for people planning to invest in IRA for their retirement. Thanks "msheldon" for helpful answer. I am going to share it with my followers at Instagram. 

Runrooster

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You can take money in a Traditional IRA and convert that to a Roth IRA. You will owe taxes on any "gains" you have in the TIRA, but pay taxes at this year's rate. If your passive income is low enough, you'll be in the 0% bracket and or no tax. Just make sure you don't convert too much Traditional IRA to a Roth IRA, or you'll bump yourself up a bracket and owe tax. (The gains you convert contribute to your "income" and can push you up a bracket on the long term capital gains rate.) The 0% bracket applied when your after-deductions income is below 37950/75900 (https://en.m.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States).

While this doesn't add more current dollars to your retirement accounts, it does increase your retirement after-tax dollars. And you spend after-tax dollars, so this is a good option if you have it!

I dont agree with gains being taxed, unless you paid taxes on the income before putting it into the traditional IRA, which would be unusual.  I think its all taxed at your current income tax rate, not at capital gains rate.  So if you put in $10000 and its grown to $14000, you pay income tax rates on the full $14000 when you rollover to Roth, not gains tax on $4000.