Paying into a Roth from pension funds

[Fireup2020]

"Roth IRA accounts can only accept money paid in that has come from taxable compensation, otherwise referred to as taxable income."

Am I correct in reading this that I will be able to contribute to a Roth account from my pension funds since they will be taxed by Uncle Sam?

If we can get a tax break, this seems to make sense to add to savings this way.

Your opinions?

 

[MasterBlaster]

That's news to me.

Are suggesting that after-tax money in 401K and pension plans can be rolled over into a ROTH IRA ?

Do you have a link or a source ?

 

[Ronnieboy]

"Roth IRA accounts can only accept money paid in that has come from taxable compensation, otherwise referred to as taxable income."

Am I correct in reading this that I will be able to contribute to a Roth account from my pension funds since they will be taxed by Uncle Sam?

If we can get a tax break, this seems to make sense to add to savings this way.

Your opinions?

I guess alimony would qualify?

 

[Alan]

I don't think income from a pension plan is allowed. You need to have earned income to qualify.

See IRS pub 590. Page 8

What Is Not Compensation?​

​

Compensation does not include any of the following items.
· Earnings and profits from property, such as rental​

· The deduction allowed for one-half of your income, interest income, and dividend income
Pension or annuity income.
.
.
.

 

[Fireup2020]

Further digging found the bummer factor:

Kiplinger.com

Only if the other half is still employed could we contribute. Hmm - maybe P/T seasonal fun wages?? (river guides, ski patrol) There must be a way to make it work! LOL

A few other sites just used the phrases "taxable income"...so I got a bit excited!

 

[MasterBlaster]

I guess alimony would qualify?

Assuming that you aren't joking...

Some 401K and pension plans allow contributions with after tax dollars.

The rules for each 401K plan are different. Depending on your plan, the IRS allows contributions from you and your employer up to $49k. Note that only $16.5K (or 22k for over 50's) is tax deducable to you. Should you choose higher payments they will go in on an after tax basis.

Pension plans have their own rules also. Some pensions take contributions from employees in after tax dollars.

 

[Alan]

I guess alimony would qualify?

Yes, it does.

 

[MasterBlaster]

We are talking about rollover IRAs ROTH here. The money rolled over into one, either from a pension plan or from a 401K, is earned income - Isn't it?

Fireup2020 - What you post relates to spousal contributions into a normal ROTH IRA. It doesn't really discuss rollover IRAs.

 

[Ronnieboy]

Assuming that you aren't joking...

Not joking, my mom is wondering if she can still contribute to a ROTH IRA but she is retired. She does get alimony from my dad still, so I was thinking that should still qualify for earned income...which Alan verified....Thanks

And a side note, when I did spell check - the suggestion for 'MasterBlaster' was Masterbat*d

 

[Alan]

Are suggesting that after-tax money in 401K and pension plans can be rolled over into a ROTH IRA ?

I'm sure it can.

I rolled a 401k into an IRA in January. The 401k had both after tax and before tax money and the 1099-R from the source company stated the sum that was after after-tax, so the IRA has a documented cost basis. I will now recharacterized some of that IRA to a ROTH, based on how much tax I am prepared to pay this year.

 

[Fireup2020]

Fireup2020 - What you post relates to spousal contributions into a normal ROTH IRA. It doesn't really discuss rollover IRAs.

No rollover - just taking a hunk of $$ each year and tucking it into a ROTH for a tax break instead of a taxable account.

 

[MasterBlaster]

I'm sure it can.

I rolled a 401k into an IRA in January. The 401k had both after tax and before tax money and the 1099-R from the source company stated the sum that was after after-tax, so the IRA has a documented cost basis. I will now recharacterized some of that IRA to a ROTH, based on how much tax I am prepared to pay this year.

OK, that's different than I first though based on the initial post. I had imagined that you could split the after tax and before tax money from your 401k into (separate) regular and ROTH rollover IRAs without paying any taxes at that stage.

 

[Alan]

We are talking about rollover IRAs ROTH here. The money rolled over into one, either from a pension plan or from a 401K, is earned income - Isn't it?

Fireup2020 - What you post relates to spousal contributions into a normal ROTH IRA. It doesn't really discuss rollover IRAs.

Fireup will need to specify but when I read this in the OP

Am I correct in reading this that I will be able to contribute to a Roth account from my pension funds since they will be taxed by Uncle Sam?

I figured we were talking about the monthly income from a pension fund not a partial lumpsum rollover

 

[Alan]

OK, that's different than I first though based on the initial post. I had imagined that you could split the after tax and before tax money from your 401k into (separate) regular and ROTH rollover IRAs without paying any taxes at that stage.

I did ask the custodian of my 401(k) - Schwab - if I could take a partial rollover that consisted of only the after tax money and they said no. Possibly similar rules apply as to when you do rollovers of tIRA's to Roth's - the IRS will not let you roll over only the after tax money to a Roth.

 

[Fireup2020]

Fireup will need to specify but when I read this in the OP

I figured we were talking about the monthly income from a pension fund not a partial lumpsum rollover

This is correct (no rollovers from existing retirement accounts)

 

[martyb]

I will retire in 22 months, but my wife will continue working for 3 years past that, so we will be contributing to both our Roths for those 3 years, based on her income alone. As long as one spouse has enough earned income to cover it, both can contribute to the Roths. However, my question is this: Is income that is diverted to a 401k still considered earned? What I mean is this: While she'll be working for those 3 years, pretty much her entire income will be going into her 401k, pre-tax. She only earns about $24k per yr, so we want to put as much as possible of that into her $401k. The money to fund the Roths will actually come from my pension. I'll get the pension check, then fund the Roths. I'm just wonder whether the fact that her actual paycheck never makes it to our bank would mean anything with regards to funding the Roth. I'm thinking not, but does anybody know?

 

[Alan]

I will retire in 22 months, but my wife will continue working for 3 years past that, so we will be contributing to both our Roths for those 3 years, based on her income alone. As long as one spouse has enough earned income to cover it, both can contribute to the Roths. However, my question is this: Is income that is diverted to a 401k still considered earned? What I mean is this: While she'll be working for those 3 years, pretty much her entire income will be going into her 401k, pre-tax. She only earns about $24k per yr, so we want to put as much as possible of that into her $401k. The money to fund the Roths will actually come from my pension. I'll get the pension check, then fund the Roths. I'm just wonder whether the fact that her actual paycheck never makes it to our bank would mean anything with regards to funding the Roth. I'm thinking not, but does anybody know?

You will be okay as long as her 401k contributions and IRA contributions are less than her income.

Example, she earns $24k, 25% to 401k = $6k, her IRA $6k, spouse IRA $6k and that only comes to $18k. (I'm assuming she is >50 ).

One exception would be if you have a spouse who still works. In that case, she can contribute to a spousal IRA on your behalf as long as she earns more than she contributes to accounts for each of you, and you file a joint return. The maximum contribution in 2007 is $4,000 per person ($5,000 if you're 50 or older).

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[martyb]

You will be okay as long as her 401k contributions and IRA contributions are less than her income.

Example, she earns $24k, 25% to 401k = $6k, her IRA $6k, spouse IRA $6k and that only comes to $18k. (I'm assuming she is >50 ).

She just turned 50 last month. Actually, I was planning (hoping) to still put $6000 into her Roth IRA, as well as the same amount into mine,even though essentially all of her income is going to go into her 401k. She is still earning the income, and the fact that the money was in reality going to come from my pension income, I thought, would be offset by her earnings. Are you saying that because her income will be diverted into her 401k, that any Roth contributions are offset by that amount? I hadn't really thought of that, and havent' read anything covering that specifically. Guess I have more research to do. She only earns about $24k & we were plannning to put nearly all of that, after state taxes & other mandatory witholdings, into her 401k.

 

[Alan]

She just turned 50 last month. Actually, I was planning (hoping) to still put $6000 into her Roth IRA, as well as the same amount into mine,even though essentially all of her income is going to go into her 401k. She is still earning the income, and the fact that the money was in reality going to come from my pension income, I thought, would be offset by her earnings. Are you saying that because her income will be diverted into her 401k, that any Roth contributions are offset by that amount? I hadn't really thought of that, and havent' read anything covering that specifically. Guess I have more research to do. She only earns about $24k & we were plannning to put nearly all of that, after state taxes & other mandatory witholdings, into her 401k.

That doesn't sound like it would be allowed. Earned income = $24k, money paid into retirement accounts (401k + IRA's) =$36k.

As you say, you should do some research before going ahead with that plan.

 

[Alan]

Looking again at pub 590, you cannot contribute more than your taxable compensation. If your wife puts her whole income into a 401k, and has no taxable income then she can't contribute to IRA's at all.

 

[martyb]

But....I'm talking about Roth IRA's, not Traditional IRAs....wonder if that makes a difference?

 

[Alan]

But....I'm talking about Roth IRA's, not Traditional IRAs....wonder if that makes a difference?

No, the contribution limits and rules apply to both. see page 60 on Roth IRA's describing "Compensation" as the same as for tIRA's. ie only taxable earned income.

 

[martyb]

Reading over the IRS pub 590, it's not looking good. I guess the next thing I need to figure out is whether it would be better to put 100% of wife's income (after mandatory witholdings) into her 401k, or to contribute $12000 into our Roths and then whatever's left into her 401k. Keep in mind, we'll be in our mid-50's by then, I'll have a COLA'd pension and then another COLA pension from my military reserves that will kick in at age 60 (7 yrs from now). So many questions...I once thought I almost had everything figured out.

 

[Alan]

So many questions...I once thought I almost had everything figured out.

Welcome to the club, it happens to me all to regularly

 

[martyb]

Of course, there's always the option for me to not retire in 22 months. I could keep working & putting more money away....but I really don't want to think like that...

Thanks, Alan for your help!