Funding a Roth IRA with money from odd jobs
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?
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.
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.
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.