Roth IRA without earned income?

[_JP]

This is an actual case with someone I know.

She's a foreigner. She has a work visa - I forgot the name, but it sounds
like a type of visa with which she can stay here and work legally. I am not
really sure about what the deal is, but according to what I heard from her,
somehow she's staying here legally with this visa, but she's not currently
working, not officially at least.

She's helping her friend running a store, making a very little money, which
is not reported to IRS. The most of her expenses are from her savings,
which must be a good amount. Right now she's in process of opening her own
store, taking care of legal and business stuff.

Anyway, the other day we somehow got into talking about IRA stuff. It was
then when I learned that she has been making contributions to her Roth IRA
account past two years. From what I understand, one needs to have earned
income in order to be eligible to have such privilege. She hasn't filed her
tax ever, so I am darn sure she never had official earned income. How is
this possible?

If she was not supposed to make contributions to her Roth IRA indeed, what
would be the options for her to rectify the situation?

Thank you very much in advance.

_JP

 

[Gene E. Utterback, EA]

This is an actual case with someone I know.

She's a foreigner. She has a work visa - I forgot the name, but it sounds
like a type of visa with which she can stay here and work legally. I am not
really sure about what the deal is, but according to what I heard from her,
somehow she's staying here legally with this visa, but she's not currently
working, not officially at least.

She's helping her friend running a store, making a very little money, which
is not reported to IRS. The most of her expenses are from her savings,
which must be a good amount. Right now she's in process of opening her own
store, taking care of legal and business stuff.

Anyway, the other day we somehow got into talking about IRA stuff. It was
then when I learned that she has been making contributions to her Roth IRA
account past two years. From what I understand, one needs to have earned
income in order to be eligible to have such privilege. She hasn't filed her
tax ever, so I am darn sure she never had official earned income. How is
this possible?

If she was not supposed to make contributions to her Roth IRA indeed, what
would be the options for her to rectify the situation?

Thank you very much in advance.

_JP

This is kind of like driving 75MPH in a 25MPH zone - it works great till you
get caught.

Either the brokerage where she is investing has not asked about her
employment status or she lied about it. You are correct, she is not
entitled to make contributions to ANY type of IRA unless she has earned
income.

She is now subject to an excise tax on the contributions for each year the
money stays in the account. She should remove the money as soon as
possible.

What she really needs to do is to get to a tax pro that can help her.

Good luck,
Gene E. Utterback, EA

 

[Tad Borek]

This is an actual case with someone I know.

She's a foreigner. She has a work visa - I forgot the name, but it sounds
like a type of visa with which she can stay here and work legally. I am not
really sure about what the deal is, but according to what I heard from her,
somehow she's staying here legally with this visa, but she's not currently
working, not officially at least.

She's helping her friend running a store, making a very little money, which
is not reported to IRS. The most of her expenses are from her savings,
which must be a good amount. Right now she's in process of opening her own
store, taking care of legal and business stuff.

Anyway, the other day we somehow got into talking about IRA stuff. It was
then when I learned that she has been making contributions to her Roth IRA
account past two years. From what I understand, one needs to have earned
income in order to be eligible to have such privilege. She hasn't filed her
tax ever, so I am darn sure she never had official earned income. How is
this possible?

If she was not supposed to make contributions to her Roth IRA indeed, what
would be the options for her to rectify the situation?

JP,
There's a nice sort of justice to that...first, she doesn't pay taxes on
her earned income. But then she gets nailed because she opens a Roth IRA
in an attempt to avoid taxes on her investment income as well. That's a
shame.

She's got a bit of a catch-22. She needs to find some income to justify
those IRA contributions (read: file taxes), and at this point she
probably owes late-filing/payment penalties and taxes. Or (maybe "and"?)
she needs to pay the penalties associated with over-contributing to an
IRA, which have been ticking along since she made her first deposit.
Either way the tax man has caught up with her, because the funds are
with an IRA custodian that is required by the IRS to do certain
reporting. They're not required to verify that you've met the income
requirements though - that's how she's able to open and fund the account.

It might have been easier if she hadn't been paid under the table...she
might not even have owed much tax, while still making those contributions.

Before opening her business she should familiarize herself with the
concept of paying taxes. Amending (i.e. late-filing) those past couple
years returns and fixing the IRA would be a good start. It only gets
more complicated - a lot more complicated - when you own a business,
especially if her business is subject to sales tax. Tell her to see an
accountant.

-Tad

 

[tragicallyhip]

JP

The only person I know who can have an IRA without earned income is the
spouse of a contributor who has earned income (spousal IRA). Unless
she's married to someone who earns (reported) income, she's in a real
pickle.

She, however, does not have my sympathy. Here she is in the US on a
VISA, making undeclared income and not filing taxes as well as illegally
opening an IRA in the hopes (?) of shielding income earned on
investments. When Uncle Sam catches her, and he eventually will, she'll
be in a heap of trouble with the IRS and she can kiss her Visa goodbye.
And... Good Riddance! Crooks should be in prison.

 

[_JP]

I understand that you don't have any sympathy... What can I say? Although
she's a personal friend of mine, I agree with you 100% that what she did was
wrong - not paying taxes for the money she earned, even though it was a very
small amount.

On the other side, maybe because she's my friend, I kinda understand why she
didn't pay taxes. It's like babysitters not paying taxes for the money they
earn. I don't know for sure how much money she made from her "job," but it
might even be small enough for her not to file taxes. I know her intention
for helping her friend out running a store was more of to get hands on
experience, not to make money. Right now she's in process of setting up her
own store as I said. Well, maybe she will cheat on her tax with her own
business in the future, which is very possible , but at least she hasn't
done that yet. I know. As I said previously, the law is law and what she
did was still wrong - if her income was big enough to make tax filing
mendatory, not optional to her that is.

This I know for sure. Her intention for opening a Roth IRA was not to cheat
more on taxes. Whoever opened the account for her explained to her that she
wouldn't have to pay tax on gains when she takes the money out after she
retires, that sounded pretty good to her, so she went ahead and did it.
It's a shame. And, if it's a crime, it a crime out of ignorance, not of
evil intention.

After reading replies here, it's clear that she'd better talk to a CPA and
fix this mess as soon as possible. I will tell her right away.

Thank you very much for your answer, and thank you everyone who responded to
my question.

Have a nice day.


_JP

 

[Michael Sullivan]

JP

The only person I know who can have an IRA without earned income is the
spouse of a contributor who has earned income (spousal IRA). Unless
she's married to someone who earns (reported) income, she's in a real
pickle.

She, however, does not have my sympathy. Here she is in the US on a
VISA, making undeclared income and not filing taxes as well as illegally
opening an IRA in the hopes (?) of shielding income earned on
investments. When Uncle Sam catches her, and he eventually will, she'll
be in a heap of trouble with the IRS and she can kiss her Visa goodbye.
And... Good Riddance! Crooks should be in prison.

That might not be true if she sees a tax specialist *now* and pays all
the appropriate penalties (whether from late-tax filing, or IRA
pulling). It's probably worth consulting an immigration attorney as
well about the potential ramifications of any actions.

I tend to agree with you that if she's not willing to turn around and do
the right thing, I won't feel very sorry for her when she gets deported.


Michael