Wednesday, February 15, 2012

IRA Contributions limited to Earned Income

Q.  My daughter wants to start contributing to a Roth IRA.  Since she's in her early 20s and still in school, I will make the contribution on her behalf. She worked part time at her school last year, and earned around $1,850. I understand since she's under age 50, the maximum she can contribute is $5,000, but the brokerage house where I want to make the contribution isn't clear. Can you help?

A.  I'll try. Yes, normally the maximum contribution for a person under age 50 is $5,000. However, you can only contribute amounts originating from earned income. You will need a copy of her W-2 form, and whatever is in box 1, up to $5,000 will be her maximum contribution. From what you stated, it sounds like you will be limited to around $1,850. The law prevents us from making a contribution from investment funds.

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