Tax on conversion of money market to Roth IRA?

What is this money-market account? Is it in a traditional IRA? Is it in a plain old taxable account? If it is in a traditional IRA and you have never made non-deductible traditional IRA contributions, the entire $8700 will be taxable and on top of that, the $2000 you don't convert will be subject to the 10% early withdrawal penalty (unless you meet one of the criteria for an exception).

The whole $3750 is taxable income. Doesn't matter that no taxes were taken out of it.

Of course you have to report it (why do you think you might not have to?), though you can offset legit business expenses (if you had any) against it. You'll also owe some self-employment tax on that $600.

Assuming you are single, take the standard deduction, and have no business expenses you project out as follows:

Self-employment tax on teaching income: $85

Gross income: IRA conversion/liquidation: $8700 Unemployment: $3750 Job: $2100 Teaching: $ 600 ------------ $15150 adj for half of SE tax: (43) ------------ Adjusted gross income: $15107 Less std deduction: ( 5150) Less personal exemp: ( 3300) ------------ Taxable income: $ 6657

Taxes: Income tax: $666 SE tax: $ 85 Penalty tax: $200 (10% of unconverted part of IRA withdrawal) ----------- Total Tax $951

Maybe. It depends on your total income situation. For example, if you have the job all of next year, it may well cost you less in taxes to do the whole conversion this year.

If this is a plain old taxable account, you probably will owe very little taxes on the withdrawal. Money market funds usually keep their NAV at $1. So all the earnings would have come in the form of dividneds. Assuming you've paid the tax on the dividends from previous years, all you'll owe is the tax on the dividends from this year (which you owe regardless of whether you withdraw the money or not). Dividends are taxed at the 15% rate unless you're in a low tax bracket, in which case they're taxed at the 5% rate.

On the other hand, if this money is in IRA account, you'll probably be eligible to do a Roth conversion. In that case, you don't have to worry about Roth contribution limit. However, you will owe ordinary income tax on whatever portion you haven't already paid taxes on. As Rich said, this could be a VERY smart move, since you're probably in a very low tax bracket this year.

--Bill

If this is a plain old taxable account, you probably will owe very little taxes on the withdrawal. Money market funds usually keep their NAV at $1. So all the earnings would have come in the form of dividneds. Assuming you've paid the tax on the dividends from previous years, all you'll owe is the tax on the dividends from this year (which you owe regardless of whether you withdraw the money or not). Dividends are taxed at the 15% rate unless you're in a low tax bracket, in which case they're taxed at the 5% rate.

On the other hand, if this money is in IRA account, you'll probably be eligible to do a Roth conversion. In that case, you don't have to worry about Roth contribution limit. However, you will owe ordinary income tax on whatever portion you haven't already paid taxes on. As Rich said, this could be a VERY smart move, since you're probably in a very low tax bracket this year.

--Bill

not an IRA - called a liquid assets fund - so basically a plain account.

my understanding is that one does not need to report self-employment earnings of 600 or less under a single contract. i can't remember wether this is actually 600 or less or if its LESS THAN 600.

so as a single filer i automatically take out 8450? i have heard different figures from several people and am a little confused.

this is my main question. i plan to have the job at the most 5 months into next year. more likely only 1-3 months. also i am planning to go back to school next year and not be working at all.

Which is why I quote for you a reputable source,

That totally changes things. The money-market being in a plain old taxable account means that *none* of the money withdrawn from it is taxable, which changes the entire calculation.

However, this also means you aren't doing an IRA conversion. Instead you are making a plain old Roth IRA *contribution*. That means you are subject to contribution limits. The hard limit is no more than $4000 (unless you're over age 50, in which case it is $5000, I believe). But the other limit is that you can't contribute more than the earned income you had in the year. Unemployment doesn't count as earned income. Your earned income will only be $2700 ($2100 job and $600 teaching), so your max contribution will only be $2700.

That said, if you can afford to make it, definitely make the $2700 Roth IRA contribution. Making it won't cause you any taxes, and when it comes out in retirement, it and all the earnings on it will be tax-free.

Your understanding is incorrect. Sounds like you are confusing the requirements for the PAYOR to issue a 1099-MISC with the requirements for the PAYEE to report the income. If it's even $1, you have to report it. So yes, you need to fill out a Schedule C (probably can get away with a Schedule C-EZ) and Schedule SE to report the income and calculate the SE tax.

If you are a single filer, the combined standard deduction and personal exemption is $8450. So if you are single, not anyone's dependent, and do not itemize deductions, then yes, you will subtract $8450 from your adjusted gross income to arrive at your taxable income.

Now that you've clarified the money-market situation, you won't be paying any tax at all (other than around $85 of SE tax), so there's no reason not to make the maximum Roth IRA contribution you're eligible to make, assuming you can afford to do it.

Are money market dividends typically qualified dividends? I assume that this is the implication here. Otherwise the OP would pay income tax rates on the dividends, right?

-Will

But the

Really? from all the research i have done, i haven't heard of this limit. even if i am transferring the 4K out of what is basically an old savings account?

So if you are single, not

if i did decide to itemize deductions then i would not be able to claim the 5150 deduction but i would still claim the 3300? can the deductions then only be used for expenses incurred while working for the job that paid me 600?

actually i believe i am going to be taxed on the interest earned since the account went under my name (although it is almost negligible).

Yes.

See IRS Publication 590 (among other things). The allowable IRA contribution is the *lesser* of $4000 or your earned income.

Doesn't matter where the money is coming from.

Correct.

Legitimate business expenses related to that $600 job are directly deducted from that $600 on Schedule C/C-EZ whether or not you itemize. Itemized deductions (like charitable contributions, property taxes, mortgage interest, etc.) are taken on Schedule A.

You'd be taxed on the interest whether or not you withdrew funds from the account.

I just looked at my 2005 taxes. The difference (from 1099-DIV form from broker) between Box 1a (tot dividends) and 1b (qualified dividends) appears to be the exact amount I received as money market dividends. Leads me to conclude that MM dividends are not qualified, or that the MM I chose is somehow not qualified. I did search a bit, both on the IRS site, and broker sites, and came up pretty empty for a good reference. JOE

No, because MMF dividends derive from interest paid on fixed-income holdings.

And interest on bonds isn't dividends paid from earnings by corporations.

Splicing together the pieces of the tax code to get to this is more tedious work than I'm willing to put in, but here are a few other references that should suffice:

American Century: "The mutual fund will pass through to shareholders any qualified dividends it receives from stock in the fund's portfolio. ... The qualified dividend rules do not apply to bond or money market investments."

wwwDOTamericancenturyDOTcom/workshop/articles/mf_distributions.jsp

Motley Fool: "Not all dividends qualify [for the qualified dividend tax rate], such as ... [d]ividends from mutual funds attributable to interest and short-term capital gains (but 'pass through' dividends from the mutual fund and long-term capital gain dividends do qualify)"

wwwDOTfoolDOTcom/taxes/2003/taxes031003.htm

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I could transcribe whole pages, but that would violate other rules (not to mention copyrights :-)

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