Question

Forbes, age 14, has $3,000 of unearned income from CDs given to him by his great-aunt Fuschia. He also has earned income of $2,500. His great-aunt Fuschia wants him to open a Roth IRA. Which of the following is true?

a.) Forbes may not open a Roth IRA because he is too young.
b.) Forbes may contribute $2,500 to his Roth IRA.
c.) Forbes may contribute $5,500 to his Roth IRA.
d.) Forbes may contribute $6,000 to his Roth IRA.

Answer 1

Forbes may contribute up to $5,500 to his Roth IRA, but since he only has earned income of $2,500, he can only contribute that amount.

Step-by-step explanation:

In accordance with prevailing tax regulations, Forbes has the prerogative to contribute a maximum of $5,500 to his Roth IRA. It is imperative to note that this contribution ceiling is applicable to both earned and unearned income. However, the actual amount Forbes can contribute is contingent upon his earned income. Given that Forbes possesses an earned income of $2,500, this becomes the upper limit for his Roth IRA contribution.

Consequently, the accurate statement is that Forbes is eligible to contribute up to the extent of his earned income, i.e., $2,500, rather than the maximum permissible limit of $5,500. Thus, option c), asserting that Forbes may contribute $5,500 to his Roth IRA, is inaccurate. The nuanced understanding lies in aligning the contribution limit with Forbes's earned income, elucidating the correct and contextually precise nature of the situation.