Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.
-- Have something you want to ask Ed? Send your questions to
This week, IRA expert Ed Slott answers questions about Roth IRA conversions and early distribution penalties.
Question 1:
Ed,
I want to employee my father so he can contribute to a Roth IRA. He has earned income now, but he is looking to retire in the next few years and I want him to still be able to contribute to his Roth. I am not a business owner, but would I be able to pay him wages?
My father lives in Pennsylvania and I live in Hawaii. Since college I have stored all my collectibles and personal items in the top level of the house. He maintains that area by cleaning and I would like to pay him for this work. Would this be considered legitimate work from the IRS standpoint?
I am looking for a starting point on how to employee him so he has earned income and can contribute, and then I would like to know how to begin the process of paying him. Do I need a payroll software system for withholdings or do I pay him through a 1099 Misc?
Any advice would be great!
Thanks,
Brian
Answer:
You are correct that your father would have to have earned income to contribute to a Roth IRA. If you want to pay him for services you should consult your tax advisor on how that should be done and how it will be reported.
Question 2:
Hi Ed,
I would like to know if an unemployed person could withdraw his/her 401(k) retirement money before the age of 59. I understand the person would have to pay the regular taxes plus and additional 10% penalty. We wonder if the IRS can wave the additional 10% penalty considering the fact that the only income for this year would be the 401(k) retirement money.
I look forward to receiving your information.
Thank you,
Ana Gust
Answer:
If the unemployed individual was age 55 years old when they left their job, distributions from the 401(k) plan will be subject to income tax only (on the pre-tax amounts distributed), but not subject to the 10% early distribution penalty.
Age 59 1/2 applies to distributions from IRAs. IRS does not have the authority to waive the 10% penalty. However, the tax code does have a number of exceptions to the penalty for things such as higher education expenses (for IRA distributions only) and for medical expenses. You can find a description of all of the exceptions in IRS Publication 590.
Question 3:
I am 62, still working and earning under $50K/year. I have $100K in a traditional IRA. Should I convert to a Roth IRA with 5 years left to my retirement?
Thank you,
Leslie
Answer:
In general we favor Roth IRAs for many reasons. However, a Roth may not be advantageous for everyone. Right now, income tax rates are the lowest they have been in years. Doing a conversion now means you will not have to worry about tax rates on future distributions. But if you are going to need funds from the account shortly after converting, a Roth IRA might not be beneficial for you. Another consideration would be whether or not you have other, non-IRA, funds to pay any income taxes due on the conversion. To Roth or not would be a good discussion to have with your tax advisor.
-- Have something you want to ask Ed? Send your questions to
