Roth IRA for prisoner

I'm about 90% positive that work performed by a prison inmate is not considered employment by IRC Section 3121. As such, it would not be taxable compensation for purposes of making an IRA contribution.

The only things I've been able to find (after a quick look) deal with withholding employement taxes from the wages of inmates. Sometimes the withholding taxes apply, sometimes they don't. But when they don't it's not because the money isn't earned income - it's because there is some exemption. But payments for prison labor are still earned income. Section 3121 doesn't discuss prisoners or prison labor at all, as far as I can tell.

While I don't share Alan's confidence level (not that I disagree - just that I know nothing about the classification of prison labor), I do share his caution that you need to confirm whether her earnings are considered compensation for the purposes of qualifying for an IRA contribution.

Once that hurdle is crossed, there are no other legal issues that I'm aware of.

Ira Smilovitz, EA

All I have seen is that it is taxable income (though it might not rise above the threshold for filing),but NOT considered earned income re the EITC: "Amounts received for work performed while an inmate in a penal institution aren't earned income when figuring the earned income credit. This includes amounts for work performed while in a work release program or while in a halfway house."

On 22-Oct-17 12:02 AM, Alan wrote: ...

(a) Wages For purposes of this chapter, the term ?wages? means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include? ... (6) service performed in the employ of the United States or any instrumentality of the United States if such service is performed? (A) in a penal institution of the United States by an inmate thereof; ...

(Do text search for "penal" to find specific section)

Seems pretty conclusive isn't earned wages for the purpose, indeed...

So, it is not earned income for FICA. How does that relate to ROTH IRA contributions? I don't think it does, because it IS income subject to income taxation.

I'm sure the point about prison wages being taxable is more than academic. It would be pretty much impossible for an inmate to earn enough to have to even file, but many are married with spouses who have to file. I guess I could ask my friend if she gets a W-2. I don't think there is a de minimus exception from providing a W-2.

But it occurred to me that I can do this regardless. Let's say I put in $300 a year for 3 years until she's released. She won't have tax liability for the dividends. When she gets a job she can sell it and pay the capital gains tax, if any, then open a Roth and put the money in. It's not like she's going to be maxing out her retirement contributions the first year she's working.

It did occur to me that a great, legal tax dodge would be to marry an inmate, especially one in a state with no income tax. But there are downsides to that too!

Does "a penal institution of the United States" mean only a federal prison? Is the rule different for someone in a state prison?

Bob Sandler

The next subsection has similar language excluding inmate pay in state prisons.

There is a whole lot of very specific langauge about D.C., Guam, and American Samoa but as I read it (quite possibly wrong) if she were in prison in Puerto Rico or the USVI her prison income would not be excluded.

R's, John

(a) Wages For purposes of this chapter, the term ?wages? means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include? ... (6) service performed in the employ of the United States or any instrumentality of the United States if such service is performed? (A) in a penal institution of the United States by an inmate thereof; ...

Seems pretty conclusive isn't earned wages for the purpose, indeed... ======== You're confusing your purposes. Note that it says "[f]or purposes of this CHAPTER," (emphasis added). That means it's not wages for the purposes of the FICA taxes, but says NOTHING about income tax. The social security and Medicare taxes are in a different IRC chapter than the income tax.

As long as it's taxable for income tax purposes and is "earned income," it counts for IRA purposes..... (and it is earned income).

That was my take, too.