Author Topic: Is a Traditional IRA Distribution "compensation?"  (Read 2060 times)

TomTX

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Is a Traditional IRA Distribution "compensation?"
« on: August 29, 2014, 07:56:20 AM »
So, my parents will have to take Required Minimum Distributions from their IRAs relatively soon. Their living expenses are already covered by a pension.

Do these distributions count as "compensation" for the purposes of contributing to  a ROTH IRA? IRS 590 isn't entirely clear on the topic.

http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230355

Lkxe

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #1 on: August 29, 2014, 08:59:00 AM »
The answer is no. Think of an Ira as a pension you set up for yourself or as deferred compensation ( that tax free thing). 

Jack

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #2 on: August 29, 2014, 09:14:15 AM »
If IRA distributions were "compensation" then you could use that money as contributions to a different IRA, basically defeating the point of the Required Minimum Distributions. Although I suppose it's possible the IRS could make a mistake like that, A) I don't think it's likely and B) I wouldn't want to rely on such a loophole.

Cheddar Stacker

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #3 on: August 29, 2014, 09:23:05 AM »
It's only considered compensation if it's earned income. In other words, if you pay FICA taxes on it.

A rough list (off the top, not researched) would be:

Considered Compensation:
Wages, salaries, tips
SE Income
Business Income
Farm Income (Maybe-unsure)

Not compensation:
Interest
Dividends
Tax Refunds
Captial Gains
IRA/401K/Pension Distributions
Real Estate Income
Social Security
Alimony

Gone Fishing

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #4 on: August 29, 2014, 09:29:25 AM »
Although they probably can't contribute, they can probably still do a rollover into a Roth if they are willing to pay the taxes.

TomTX

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #5 on: August 29, 2014, 08:52:55 PM »
Although they probably can't contribute, they can probably still do a rollover into a Roth if they are willing to pay the taxes.
Hm. Well, looking at it from another perspective - can a rollover to a Roth count toward the RMD?

One way or another, they will have to pay the taxes on the money coming out of the traditional IRA.

Thanks everyone for the input.

Edit: Well, according to IRS 590, the answer is "no." Oh, well.
« Last Edit: August 29, 2014, 08:56:08 PM by TomTX »

Gone Fishing

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Re: Is a Traditional IRA Distribution "compensation?"
« Reply #6 on: September 02, 2014, 01:46:37 PM »
If they really don't need it (sounds like a truly Mustachian problem to me!), they could contribute it to their favorite non-profit, deduct it on their taxes and effectively wash out the additional tax liability.