an IRA with rental income
Can I open a Roth IRA if my only income is from rental property
and interest? Is income from being a landlord considered earned
income? I am looking for a way to put this money into a fund that
does not pay taxes or need to be declared for the next three to
In order to set up an IRA, Roth or otherwise, you (or in the case
of a married couple filing jointly, either spouse) must have taxable
compensation, which is a more precise way of saying earned income.
Compensation for purposes of an IRA includes wages, salaries, commissions,
self-employment income, alimony and separate maintenance. It does
not include earnings and profits from property, interest and dividend
income, pension or annuity income, deferred compensation, income
from certain partnerships or any amounts excluded from income (such
as from Form 2555, relating to the foreign earned income exclusion).
Since rental income is not considered compensation
for purposes of an IRA, you cannot make an IRA contribution. If
you have sufficient rental activities and you're keen on contributing
to an IRA, then you might want to consider setting up a management
company that would employ you to manage the properties.
For example, you can set up an S corporation that
receives a management fee from each property. Those fees are deducted
on the rental property Schedule E and, in effect, wash with the
income realized by the S corporation. The S corporation uses these
fees to pay you a salary, which allows you to make your IRA contribution.
However, an IRA is really not an investment to make
for three to five years. At a minimum, a Roth IRA needs to be around
for five years in order to achieve the tax-free return you're looking
for on growth within the account.