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George Saenz, the Bankrate.com Tax Talk columnist Funding a Roth IRA with money from odd jobs

Dear Tax Talk,
My son has an unpaid internship for part of the summer and plans to start law school in the fall. He will try to do some local work in the neighborhood, such as tutoring or landscaping, in the few weeks before and after his internship. Being that he's 22 years old, can he fund a Roth IRA with his earnings, or does the Internal Revenue Service frown upon such menial work for someone his age?
-- Patti

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Dear Patti,
Unlike parents, the IRS does not judge where a person gets his income; the government agency just wants to tax it. Whether you're an illegal immigrant, a criminal or just underachieving, as long as you pay your taxes, the IRS is happy.

Provided your son has compensation income, he can contribute to an IRA. Compensation income is income either shown on a Form W-2 or 1099-misc as nonemployee compensation. Form 1099-misc earnings are usually reported on Schedule C of Form 1040, minus direct expenses. The net Schedule C income must be reduced by one-half of your self-employment tax deduction reported on line 26 of Form 1040 to arrive at compensation income for the IRA limit.

In 2007, the most your 22-year-old son can contribute to an IRA is the lesser of $4,000 or his net compensation income for the year. For example, if your son has $1,000 in wages and $1,000 net on Schedule C and a self-employment tax deduction of $76 on line 26 of Form 1040, the most he can contribute to a Roth IRA is $1,924. If the wages were $3,000, the most he can contribute is $3,924.

A 6 percent excise tax penalty applies annually to any excess contributions to a Roth or traditional IRA. An excess contribution is a contribution that exceeds the compensation limit or is in excess of the overall $4,000 limit.

Bankrate.com's corrections policy-- Posted: April 26, 2007
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