Hobby income qualifies for ROTH contribution?

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Taxed
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Joined: Thu Apr 12, 2018 4:42 pm

Hobby income qualifies for ROTH contribution?

Post by Taxed » Thu Apr 12, 2018 4:49 pm

I have a quick tax question that I have been unable to answer via the IRS website.

If ones only “earned” income is from a hobby can that $ be contributed to a ROTH?

I understand that you can only contribute “earned” income towards a ROTH but I cannot determine if hobby income is indeed considered “earned” income.

The money is a 1099-MISC and from one person representing 3 days of activity. Primary income otherwise is retirement distribution.

There is a reference to this exact question on this blog from 2014 but the link referred to is no longer active. I’m hoping someone smarter than me can point me to a clear answer. Thanks. I've been trying to answer this for weeks.

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Pajamas
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Re: Hobby income qualifies for ROTH contribution?

Post by Pajamas » Thu Apr 12, 2018 8:18 pm

Here's what constitutes compensation for IRA purposes:

https://www.irs.gov/publications/p590a# ... 1000230364

They key here is whether you treat this activity as a hobby or as self-employment for tax purposes.

https://www.irs.gov/newsroom/hobby-or-b ... -to-decide

Taxed
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Re: Hobby income qualifies for ROTH contribution?

Post by Taxed » Thu Apr 12, 2018 9:14 pm

Hello Pajamas,

Thank you for taking the time to reply. I am familiar with form 590-A but I don’t think it answers my question.

On page 6 under “What is compensation?” it clarifies what is counted and what is not. Unfortunately it does not clearly identify “hobby” in either category on table 1.1 “Compensation for Purposes of an IRA”

And under “What isn’t compensation” hobby is also not included. They do however state under “what is compensation” the following:

“Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation.”

But its still not clear if “other amounts you receive for providing personal services” includes hobby income?

I also reviewed the “Hobby or Business? IRS offers tips to Decide” page you linked to. Thank you. According to the IRS’ “nine factors when determining whether an activity is a hobby” this 1099-MISC income would clearly fall under hobby income.

I’m hoping someone with personal experience may be able to help clarify what is indeed considered compensation for the sake of ROTH contributions. It seems like hobby income would indeed qualify but since one is not required to pay self employment tax on hobby income it still seems like a gray area.

Spirit Rider
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Re: Hobby income qualifies for ROTH contribution?

Post by Spirit Rider » Thu Apr 12, 2018 10:12 pm

In order to be considered self-employed you must be engaged in a trade of business. Your hobby does not qualify.

Net self-employment earnings are compensation, hobby income is not.

It is very simple, no compensation, no IRA contribution.

Taxed
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Joined: Thu Apr 12, 2018 4:42 pm

Re: Hobby income qualifies for ROTH contribution?

Post by Taxed » Sun Apr 15, 2018 11:59 pm

Thank you for taking the time to respond. I really appreciate it.

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