How to handle income from rental properties
Q: I’m a retired real estate agent, and I manage rental properties. Does my rental income count as having a job for the purpose of contributing to an IRA?
A: No, earnings and profits from property don't count. Contributions to traditional and Roth IRAs must come from “active” income — that is, compensation from working. It can include wages, salaries, tips, professional fees, bonuses and other amounts you receive for providing personal services, as well as commissions and selfemployment income.
If you work for wages or a salary, you'll receive an IRS Form W-2 for qualifying income, or if you're an independent contractor or are self-employed, you'll receive a Form 1099 MISC. Another way to know that your income qualifies is if you pay FICA or self-employment tax on it.
Earnings and profits from property, such as rental income, don't count as compensation. Rental income is considered passive income — that is, “money made on money,” says Ed Slott, a CPA and IRA expert. Interest and dividends are also forms of passive income.
Slott suggests a couple of workarounds: You could form your own property-management company as a corporation or limited-liability company and become its employee. Then you could have a solo 401(k) (see www.irs.gov/retirement-plans/ one-participant-401k-plans).
Or, if you file a joint return with your spouse and your spouse has earned income, you could each contribute to your own IRAs, as long as your spouse earns enough income to cover each of your contributions. In that case, you can use your rental income to fund your spousal IRA.
For 2019 and 2020, your total annual contributions to your traditional and Roth IRAs can't exceed $6,000 ($7,000 if you're age 50 or older) or your taxable compensation for the year, if your compensation was less than that dollar limit.
If you and your spouse are funding a regular and spousal IRA, the combined contributions can't exceed the taxable compensation that you report on your joint return.
Note that your Roth IRA contribution might be limited based on your filing status and income. Singles can make a full or partial contribution to a Roth if their income is up to $137,000 in 2019 and $139,000 in 2020. Married joint filers are eligible to make a full or partial contribution to a Roth if their income is up to $203,000 for 2019 and $206,000 in 2020.
You can make a contribution for 2019 up until April 15, 2020(see www.irs.gov/formspubs/about-publication-590-a).
Patricia Mertz Esswein is an associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.