IRA incentive award tax treatment

[wombman]

I recently received an account transfer cash incentive award. The brokerage firm deposited the cash into my traditional IRA; however, I am concerned as I will not have any earned income for 2022 and I don't know how the IRS will treat the deposit. Should it be deposited into my Roth or taxed brokerage account instead? The firm offered to put the award in whichever account I direct.

For reference, I am in 12% federal bracket due to govt pension (1099-R). 4.25% in Michigan.

I would appreciate any IRS.gov links discussing cash deposits by third-party for someone with no earned income in the tax year of the deposit. My brief irs.gov search suggests any IRA deposit is an excess contribution which has 6% penalty and 10% early withdrawal penalty (under 59 1/2). While a web search leads to a 2012 blog suggesting the cash is seen as interest earned on the account and would be Roth never taxed dividends, traditional dividend tax deferred until withdrawal, or taxed now as 1099 unearned dividend income in brokerage account. With wildly different tax treatment I thought it's time to consult folks that have dealt with this before.

 

[RunningBum]

If you don't have earned income, your Roth will have the same limitations.

Unless you get someone who can give you a definitive answer, I'd put it in taxable to keep it simple. If it's a very large amount you could consult a tax attorney. The difference between pay tax on it now at 12+4.25% vs. paying later at ??+??% probably isn't worth spending time on. If you could get it in the Roth without paying tax on it at all that would be ideal, but that seems unlikely to me.

 

[swakyaby]

When I retired in 2018, Fidelity gifted me a $2,500 cash bonus into my Fidelity rollover IRA for transferring sizable funds from my workplace retirement account. I had similar concerns that this cash bonus might be a taxable event. The Fidelity rep said, no, it was a gift and not a taxable event. It has been 4 years, and the IRS has not blinked an eye.

 

[cathy63]

Ask them if this amount will be included in box 1 on the 5498 they issue for your IRA in May of 2023. If not, then it's fine to leave it in the IRA.

 

[wombman]

Thank all for your quick response.

cathy63 - If it will not be reported in box 1, it would be better in the Roth, correct? I agree with RunningBum, even if it is 12%+4.25% to get into the Roth, that's where I want it. If its never taxed, even better.

swakyaby - Was the $2,500 reported on IRS Form 5498 box 1 or 1099? I will ask if the promotion cash is reported in any way on IRS Forms, or is an unreported event.

 

[OldShooter]

The brokerage house will have been asked this question more than once in the past. All you have to do is to wade through customer service reps until you connect with the person who knows the answer. SGOTI does not have the definitive answer.

 

[Montecfo]

I have done this many times. The money they put into your IRA is not taxable and does not absorb your limit.

The money they put in taxable is.

I assume they have a private letter ruling on this as it appears to be treated the same industrywide.