Can 401K withdrawals be used as earned income for Roth IRA contributions?
Title: Can 401K withdrawals be used as earned income for Roth IRA contributions? 1 I'm planning to retire around age 60 and have been thinking about my retirement accounts. I understand that once you hit 59½, you can start taking money out of your 401K without penalties. Here's my situation though - I'm wondering about Roth IRA contributions after I retire. Since you need "earned income" to contribute to a Roth IRA, I'm trying to figure out if the money I take from my 401K after retirement would count as "earned income" for this purpose. Basically, if I'm fully retired with no job or side gig at 60, can I still use some of my 401K withdrawals to fund my Roth IRA contributions? Or would I be completely unable to add to my Roth once I stop working? I want to keep building my Roth IRA even after retirement if possible, but I'm confused about this earned income requirement.
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Mateo Martinez
14 Unfortunately, withdrawals from your 401K don't count as earned income for Roth IRA contribution purposes. The IRS is pretty specific about what qualifies as "earned income" - it has to be money you actively worked for, like wages, salaries, tips, self-employment income, or taxable alimony. When you take money out of your 401K, it's considered a distribution of previously saved money, not new earnings. So if you retire completely at 60 with no other income sources, you wouldn't be eligible to make Roth contributions. You might want to consider a few alternatives though. You could do some part-time or consulting work after retirement - even a small amount of earned income would allow you to make at least a partial Roth contribution. Or you could look into converting some of your traditional 401K money to a Roth IRA through a rollover conversion (different from contributions and doesn't require earned income).
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Mateo Martinez
•6 Thanks for explaining! I'm in a similar boat. What about if I work part-time just enough to make some earned income? Is there a minimum amount I need to earn to contribute the full $7,000 (or whatever the max contribution will be in a few years)?
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Mateo Martinez
•14 You need to earn at least as much as you want to contribute to your Roth IRA. So if the contribution limit is $7,000 when you retire, you'd need to earn at least $7,000 in that tax year to contribute the maximum. If you earn less than the maximum contribution amount, you can only contribute up to the amount you earned. For example, if you only earn $3,000 from part-time work, that would be your contribution limit for that year, even though the standard limit is higher.
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Mateo Martinez
8 I ran into this exact same issue last year and was really confused about what counts as "earned income." After doing a bunch of research, I found this amazing tool called taxr.ai (https://taxr.ai) that spelled everything out for me. I uploaded my retirement documents and asked specifically about 401K withdrawals and Roth contributions. It analyzed everything and confirmed that 401K distributions aren't considered earned income for Roth contribution purposes - but it also showed me several strategies I hadn't considered! The tool identified some part-time income options that would qualify while minimizing my tax burden. It was so much clearer than trying to piece together info from random websites. The visual breakdown of different income sources and what counts toward Roth eligibility was super helpful.
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Mateo Martinez
•3 Does this tool actually give legitimate tax advice? I've been burned before by online "tax helpers" that ended up giving me generic info I could have found for free.
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Mateo Martinez
•19 How exactly does it analyze documents? I'm a bit paranoid about uploading my financial info online. Is it secure?
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Mateo Martinez
•8 It definitely gives legitimate advice - it's not just generic information. What makes it different is that it actually analyzes your specific documents and gives personalized guidance based on your situation. For example, it looked at my retirement accounts and projected withdrawals to suggest the optimal earned income I should aim for. Regarding security, they use bank-level encryption for all document uploads and analysis. Your documents are encrypted before being processed, and you can delete them from their system after you get your answers. I was hesitant too, but their security measures are actually stronger than most of the financial institutions I use.
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Mateo Martinez
3 Just wanted to follow up - I decided to try taxr.ai after asking about it here. Total game changer! I uploaded my 401K statements and a few other retirement docs, and it clearly showed me that while my planned 401K withdrawals wouldn't count as earned income, I had other options. The tool suggested I could do some independent contractor work and earn just enough to max out my Roth contributions. It even calculated how much I'd need to earn after expenses to hit the threshold. Also explained some Roth conversion strategies I hadn't considered that don't require earned income at all. Super clear explanations without the financial advisor fees. Definitely recommend it if you're trying to figure out retirement contribution strategies!
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Mateo Martinez
11 If you're having trouble getting straight answers about retirement accounts and income requirements, I had a similar frustration but finally got clear answers by talking directly with an IRS agent. The problem is those crazy hold times - I was on hold for HOURS and kept getting disconnected. Then I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS person in about 15 minutes! They have this system that navigates the IRS phone tree and waits on hold for you, then calls you when a real person is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed everything about 401K withdrawals not qualifying as earned income for Roth contributions, but also gave me some retirement-specific strategies that were super helpful. Totally worth it for getting those official answers straight from the source.
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Mateo Martinez
•7 Wait, how does this even work? The IRS phone system is notoriously terrible. I find it hard to believe anything could get through those wait times.
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Mateo Martinez
•19 Sounds like a scam to me. Why would I pay someone else to call the IRS? Can't they just give you bad info and claim it was from the IRS?
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Mateo Martinez
•11 It works by using a combination of automated systems and live operators. They've basically figured out the optimal times to call and how to navigate the IRS phone tree efficiently. Their system waits on hold so you don't have to, and only connects you when there's an actual IRS representative on the line. They don't actually talk to the IRS for you - they just handle the waiting part. When an IRS agent picks up, Claimyr calls you and connects you directly to that agent. So you're the one having the conversation with the IRS, getting information straight from the source. You're just skipping the ridiculous hold times that can sometimes be 3+ hours.
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Mateo Martinez
19 I was totally skeptical about Claimyr but I was desperate after trying to reach the IRS for weeks about my retirement accounts. I finally gave it a shot, and I'm honestly shocked it worked. After three attempts calling the IRS directly (and waiting on hold for over 2 hours each time), I tried Claimyr. They called me back in about 20 minutes with an actual IRS agent on the line! The agent walked me through exactly what counts as earned income for Roth IRA purposes and confirmed that 401K withdrawals definitely don't qualify. But the really valuable part was getting personalized advice about my specific situation. The agent explained some strategies for managing small amounts of earned income during semi-retirement that would let me keep contributing to my Roth. Saved me hours of frustration and probably prevented me from making some major mistakes with my retirement planning.
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Mateo Martinez
5 Another option to consider is doing a Roth conversion ladder after you retire. This isn't the same as making new contributions to a Roth IRA, but it's a way to get money from your traditional 401k into a Roth IRA without needing earned income. Basically, you roll your 401k into a traditional IRA, then convert portions of it to a Roth IRA each year. You'll pay taxes on the converted amount, but then it grows tax-free in the Roth. This can be really effective if you do it during early retirement years when your income (and tax bracket) might be lower.
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Mateo Martinez
•2 How much can you convert each year? Is there a limit like with regular Roth contributions?
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Mateo Martinez
•5 There's no limit to how much you can convert from a traditional IRA to a Roth IRA each year. You could theoretically convert your entire traditional IRA in one year if you wanted to. The main consideration is taxes. Since you're converting pre-tax money to post-tax money, you'll pay income tax on whatever amount you convert. Converting too much at once could push you into a higher tax bracket. Many people choose to convert just enough each year to "fill up" their current tax bracket without spilling into the next higher one.
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Mateo Martinez
22 Don't forget that after age 72 (or 73 depending on your birth year with the SECURE Act 2.0), you'll need to take Required Minimum Distributions (RMDs) from your traditional 401k/IRA anyway. Those distributions are taxable but still don't count as earned income for Roth contribution purposes. This is why many people try to build up their Roth accounts earlier in their retirement journey - to have more tax-free withdrawal options later.
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Mateo Martinez
•1 That's a good point about RMDs. I'm worried about tax implications when I have to start taking those distributions. Would doing Roth conversions earlier help reduce the RMD tax hit later?
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Nia Jackson
•Yes, doing Roth conversions earlier can definitely help reduce your future RMD tax burden! When you convert money from a traditional IRA/401k to a Roth, you're essentially reducing the balance that will be subject to RMDs later. Since Roth IRAs don't have RMD requirements during the owner's lifetime, that converted money won't be forced out as taxable income after age 72/73. The key is to do conversions strategically during your early retirement years when you might be in a lower tax bracket. For example, if you retire at 60 and have little other income before Social Security kicks in, you could convert amounts that keep you in the 12% or 22% tax bracket rather than potentially being pushed into higher brackets by large RMDs later. Just make sure to plan for the taxes on conversions - you'll want to have cash available to pay the tax bill without having to withdraw from retirement accounts.
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Aaron Boston
Great question! This is a common confusion point for retirees. As others have mentioned, 401k withdrawals unfortunately don't qualify as "earned income" for Roth IRA contribution purposes. The IRS defines earned income very specifically as compensation from work - wages, salaries, self-employment income, etc. However, you have several good alternatives to consider: 1. **Part-time work**: Even minimal earned income (consulting, part-time job, gig work) would allow you to contribute to a Roth IRA up to the amount you earned that year. 2. **Roth conversions**: You can convert money from your traditional 401k/IRA to a Roth IRA without needing earned income. This isn't a "contribution" but achieves a similar goal of getting money into a Roth account. 3. **Spousal IRA**: If you're married and your spouse has earned income, they can contribute to an IRA for you even if you don't work. The key is planning this strategy before you fully retire. Many people do a combination of small amounts of earned income plus strategic Roth conversions during their early retirement years to maximize their tax-advantaged savings.
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Arjun Kurti
•This is really helpful! I hadn't thought about the spousal IRA option. My wife will probably keep working part-time even after I retire, so that could be a good backup plan. One question though - if I do some consulting work to generate earned income, do I need to worry about self-employment taxes on top of regular income taxes? I'm trying to figure out if the tax burden would eat up too much of the benefit of being able to contribute to the Roth.
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Melina Haruko
•Yes, you'll need to pay self-employment taxes on consulting income, which adds about 15.3% (Social Security and Medicare taxes) on top of regular income taxes. However, there are ways to minimize this impact: 1. **Keep it small**: If you only need to earn enough for Roth contributions ($7,000-$8,000), the SE tax hit isn't huge and the long-term Roth benefits often outweigh it. 2. **Business deductions**: As a consultant, you can deduct business expenses (home office, equipment, travel) which reduces your net self-employment income. 3. **Compare to alternatives**: Run the numbers against doing Roth conversions instead. Conversions avoid SE taxes but you'll pay regular income tax on the converted amount. The spousal IRA route with your wife's earned income might actually be the cleanest solution tax-wise if she's working part-time anyway. You could contribute to a spousal Roth IRA based on her earnings without dealing with SE taxes at all.
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