Roth IRA - no earned income

[Catherine]

Older couple, retired.  She put $6,500 into a Roth IRA for 2015.  He earned $4K, roughly, before retiring.  Taxable *income* is $84K-ish (IRA distributions) but earned income is his $4K.  She has to take $2,500 out of that Roth IRA pronto, yes?  

Reading the pubs they talk about taxable compensation, earnings, blah blah but somewhere in F5329 instructions it says "   Taxable compensation is your compensation that is included in gross income reduced by any deductions on Form 1040 or Form 1040NR, lines 27 and 28, but not by any loss from self-employment. "  and that is WAY different from  earned income.

So when did this change from earned income to taxable compensation -- or did it?

[FDNY]

Yes on taking the 2500 out pronto but you could extend the return if they give you a problem in getting to the phone on short notice (we'll be old someday too).

As for the other I have no idea other than taxable compensation is for contribution limits, maybe?

[Catherine]

Bump.

Anyone else have comments for me?

[jklcpa]

I'm not sure what other comments you are looking for.

You are correct that in this case the limit is the husband's comp IF he didn't contribute to an IRA of his own.

Compensation is wages, salaries, commissions, SE income (but not a loss), alimony, and nontaxable combat pay.  The SE income is after the reduction for 1/2 of the SE tax that represents the equivalent of the employer's share of the FICA and Medicare taxes.

Technically, the withdrawal of the excess isn't required. The wife could leave it in and designate the excess as a contribution for 2016 and pay the 6% on the excess for the 2015 tax year, that is assuming that one of them will have at least enough taxable compensation in 2016 to allow for that excess to be a contribution.

If they want to take the excess out and not pay the ~ $150 on the excess left in, get them an extension so that they have the additional time through the extended due date to withdraw the funds.

[Catherine]

Thanks, Judy.  

Issue for me was the wording in the IRS pubs that talked about an AGI-based "taxable compensation" limitation that said nothing about earned income/wages in their definition of compensation.  I finally found code section 219(f) and sure enough you have it spot-on.  And I was not crazy.  At least, not because of this.