Funding Roth with 1099-NEC proceedings

[RamStride]

Noob question regarding funding a ROTH IRA using 1099-NEC (non-employment compensation).

I get a 1099-NEC as an independent Rider Coach (motorcycle instructor). It is $300 per class. Right now the money is direct deposited to my Schwab account that at this time I only use for this purpose.

I would like to open a new ROTH IRA at Schwab for the year 2024 before the tax season is over this April.

During 2024, I contributed the max of $30500 to my Traditional 401k and Traditional ROTH. My 2024 MAGI was <$230k.

I am 56 y/o. I have been reading about the 5-year holding requirement before you can withdraw from a ROTH IRA. So, I started thinking that I should open a ROTH IRA at Schwab to start the clock. My thought is that later I can start rolling the Traditionally 401k funds to the new ROTH IRA to have access to the funds. Is this possible?

 

[cathy63]

I contributed the max of $30500 to my Traditional 401k and Traditional ROTH

I am not sure what this means. You either have a traditional 401k or a Roth 401k; a traditional IRA or a Roth IRA. Did you make a non-deductible contribution to your traditional IRA maybe? Or did you mean you split your contributions between your traditional 401k and Roth 401k.

For 2025, you can fund a Roth IRA by:
- converting from a traditional IRA that has deductible contributions or rolling over funds from a traditional 401k. Both of these are taxable transactions that generate income.
- rolling over from a Roth 401k. This is a non-taxable transaction.
- if your income is below the contribution threshold, making a direct contribution to the Roth IRA. You'll pay income tax on the contribution, but it won't generate any additional income.
- if your income is above the contribution threshold and you have no money in traditional, SEP, or SIMPLE IRA accounts, making a backdoor Roth contribution. This means making a non-deductible contribution to your traditional IRA and then immediately converting it to the Roth account. You'll pay income tax on the amount you contribute, but it won't generate any additional income.

The funds you earn at the company that is paying you on a 1099-NEC are self-employment income. If that's your only income in 2025, the maximum amount you can contribute to all types of IRAs combined is the lesser of your 1099-NEC earnings minus half the self-employment tax; or $7000 ($8000 if you are over 50). If you had a regular W-2 job for part of 2025 and the "retirement plan" box is checked on your W-2, then your IRA contribution may be further limited.

 

[Gumby]

As I read IRS Publication 590-A, income received via 1099-NEC counts as compensation for purposes of contributing to an IRA. Do you currently file Form 1040-SE and/or Schedule C to report the income?

Edit to correct form.

 

[SecondCor521]

During 2024, I contributed the max of $30500 to my Traditional 401k and Traditional ROTH. My 2024 MAGI was <$230k.

First off, +1 to everything @cathy63 said. She knows her stuff, as usual.

Reading between the lines and emphasizing one part of it: I think you contributed $23,500 to a 401(k) and $7,000 to an IRA of some type, probably a traditional IRA, for 2024.

If you've already done that, then you may *not* also contribute to a Roth IRA. cathy63 pointed this out in her reply, but you can only contribute $7,000 per year total between all your IRAs, Roth or traditional (or $8,000 if you're over a certain age; I'm guessing you are not).

You can use 1099-NEC compensation to fund a Roth, but that's not your main issue. Your main issue is you've probably already maxxed out your 2024 IRA contributions.

If my reading between the lines is correct, and you decided to fund your Roth anyway, then you'd owe a 6% excess contribution penalty (on Form 5329) each year as long as the excess remained in there. There are ways to remove excess contributions if you make a mistake.

 

[RamStride]

As I read IRS Publication 590-A, income received via 1099-NEC counts as compensation for purposes of contributing to an IRA. Do you currently file Form 1040-SS and/or Schedule C to report the income?

No, I don't file a 1040-SS. The profits are reported using the normal Form 1040 Schedule C from Turbo Tax Deluxe.

 

[RamStride]

I am not sure what this means. You either have a traditional 401k or a Roth 401k; a traditional IRA or a Roth IRA. Did you make a non-deductible contribution to your traditional IRA maybe? Or did you mean you split your contributions between your traditional 401k and Roth 401k.

I have a Thrift Savings Account (TSP) from the federal government where I contribute to a tax-deferred, Traditional TSP account and an after tax ROTH TSP account.

 

[RamStride]

First off, +1 to everything @cathy63 said. She knows her stuff, as usual.

Reading between the lines and emphasizing one part of it: I think you contributed $23,500 to a 401(k) and $7,000 to an IRA of some type, probably a traditional IRA, for 2024.

If you've already done that, then you may *not* also contribute to a Roth IRA. cathy63 pointed this out in her reply, but you can only contribute $7,000 per year total between all your IRAs, Roth or traditional (or $8,000 if you're over a certain age; I'm guessing you are not).

You can use 1099-NEC compensation to fund a Roth, but that's not your main issue. Your main issue is you've probably already maxxed out your 2024 IRA contributions.

If my reading between the lines is correct, and you decided to fund your Roth anyway, then you'd owe a 6% excess contribution penalty (on Form 5329) each year as long as the excess remained in there. There are ways to remove excess contributions if you make a mistake.

For 2024, I've contributed $30500 towards the Traditional TSP and ROTH TSP for someone over 50 years of age through my regular W-2 federal government job.

I have not contributed or opened a ROTH IRA outside my TSP yet for either 2024 or 2025 or ever. I am asking here first if I can take the 1099-NEC profits to fund a separate ROTH IRA account and if there are benefits for doing that given the 5-year holding restriction.

My official retirement date is 01/01/2026. I am trying to figure out where to roll the TSP money to in 2026. That is when I started thinging about a ROTH IRA with Schwab. And if I need to make distributions I wanted to start the 5-year clock.

 

[RamStride]

If your net earnings from the motorcycle instructing business exceeded $400, I think you are also required to file Form 1040-SS and pay the Social Security and Medicare taxes. See Instructions for Form 1040-SS (2024) | Internal Revenue Service

Ugh, TurboTax Deluxe files a Schedule SE for the Self-Employment taxes. It does not show a 1044-SS.

 

[cathy63]

Ugh, TurboTax Deluxe files a Schedule SE for the Self-Employment taxes. It does show a 1044-SS.

Your profile says you're in Florida. If that's accurate, you file a Schedule SE with your 1040, you don't file a 1040-SS. The 1040-SS is for people who live in US territories like Guam or Puerto Rico.

 

[Sunset]

For 2024, I've contributed $30500 towards the Traditional TSP and ROTH TSP for someone over 50 years of age through my regular W-2 federal government job.

I have not contributed or opened a ROTH IRA outside my TSP yet for either 2024 or 2025 or ever. I am asking here first if I can take the 1099-NEC profits to fund a separate ROTH IRA account and if there are benefits for doing that given the 5-year holding restriction.

My official retirement date is 01/01/2026. I am trying to figure out where to roll the TSP money to in 2026. That is when I started thinging about a ROTH IRA with Schwab. And if I need to make distributions I wanted to start the 5-year clock.

You can open an empty roth at most brokerages without any charge. Then contribute 1 dollar for this tax year 2025 to it.
That at least starts the clock.
You can do IRA to Roth conversions into as well (they are taxable, so many wait until not earning $$$ before doing that).

I think it's too late to claim the Roth is opened in 2024.

 

[Gumby]

Ugh, TurboTax Deluxe files a Schedule SE for the Self-Employment taxes. It does not show a 1044-SS.

I was wrong about that and thought I had deleted my earlier post in time. Sorry about that. SE is the right form.

 

[cathy63]

For 2024, I've contributed $30500 towards the Traditional TSP and ROTH TSP for someone over 50 years of age through my regular W-2 federal government job.

I have not contributed or opened a ROTH IRA outside my TSP yet for either 2024 or 2025 or ever. I am asking here first if I can take the 1099-NEC profits to fund a separate ROTH IRA account and if there are benefits for doing that given the 5-year holding restriction.

My official retirement date is 01/01/2026. I am trying to figure out where to roll the TSP money to in 2026. That is when I started thinging about a ROTH IRA with Schwab. And if I need to make distributions I wanted to start the 5-year clock.

You have until April 15 to make a contribution for 2024. And until April 15, 2026 to make a contribution for 2025.

If you are single and your income for 2024 was over $150K, you cannot contribute directly to the Roth IRA. You will have to make a non-deductible contribution to a traditional IRA and then convert it to the Roth IRA, so you need to have both types of accounts.

To do this for 2024, you will need to file Form 8606 with your tax return and fill out Part I of the form to account for the contribution for the prior year (TurboTax knows how to do this if you answer its questions correctly.) Then when you file your 2025 tax return, you'll file another 8606 to account for the conversion from tIRA to Roth IRA since that will happen in calendar year 2025. If you also make a contribution and do a conversion for 2025, then those will also go on the 2025 Form 8606.

It does not matter where the money to fund the Roth IRA comes from. There's no difference between using your 1099-NEC income and using the W-2 income from your job.