Author Topic: Is LC & Prosper interest considered Passive Income by the IRS?  (Read 3678 times)

MoneyTree

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Does anybody know how the IRS characterizes interest income from LC & Prosper? I would like very much for it to be considered passive income in order to avoid having it count as part of my MAGI (Modified Adjusted Gross Income). If I have to treat it as portfolio income (as defined by the IRS) I will be ineligible for a ROTH-IRA contribution this year.


Peter

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Re: Is LC & Prosper interest considered Passive Income by the IRS?
« Reply #1 on: May 15, 2014, 11:49:56 AM »
Does anybody know how the IRS characterizes interest income from LC & Prosper? I would like very much for it to be considered passive income in order to avoid having it count as part of my MAGI (Modified Adjusted Gross Income). If I have to treat it as portfolio income (as defined by the IRS) I will be ineligible for a ROTH-IRA contribution this year.

Earnings from LC and Prosper is interest income and is treated the same way and other kind of interest bearing investment. So, it is not passive income.
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Fred

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Re: Is LC & Prosper interest considered Passive Income by the IRS?
« Reply #2 on: May 15, 2014, 01:58:55 PM »
Per IRS (bottom of http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-3-Passive-Income):

Quote
  • Passive income has only two sources:  net rental income and income from a business in which the taxpayer does not materially participate.
  • Interest, dividends, royalties, annuities and gains on stocks and bonds are not passive income.

SeattleSun

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Re: Is LC & Prosper interest considered Passive Income by the IRS?
« Reply #3 on: May 15, 2014, 09:26:33 PM »
Does anybody know how the IRS characterizes interest income from LC & Prosper? I would like very much for it to be considered passive income in order to avoid having it count as part of my MAGI (Modified Adjusted Gross Income). If I have to treat it as portfolio income (as defined by the IRS) I will be ineligible for a ROTH-IRA contribution this year.


You can "legally" beat the Roth IRA income limits by making a after tax contribution to a Traditional IRA and then immediately, like the next day, converting (Roth Conversion) it to a Roth IRA.  Do it immediately to avoid earning income on the $5,500 Traditional IRA contribution which may complicate things.  Like you might try to roll $5,500.01 if you let it sit there a few days.

This is known as a "Back Door Roth IRA" contribution.

Just google that to get more info on the subject.


http://online.wsj.com/news/articles/SB10001424052702304104504579375432214126664
« Last Edit: May 25, 2014, 02:53:40 PM by SeattleSun »

bobeubanks

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Re: Is LC & Prosper interest considered Passive Income by the IRS?
« Reply #4 on: May 16, 2014, 01:30:03 AM »
Does anybody know how the IRS characterizes interest income from LC & Prosper? I would like very much for it to be considered passive income in order to avoid having it count as part of my MAGI (Modified Adjusted Gross Income). If I have to treat it as portfolio income (as defined by the IRS) I will be ineligible for a ROTH-IRA contribution this year.


You can "legally" beat the Roth IRA income limits by making a after tax contribution to a Traditional IRA and then immeidately, like the next day, converting it to a Roth IRA.  Do it immediately to avoid earning income on the $6,500 Traditional IRA contribution which may complicate things.  Like you might try to roll $6,500.01 if you let it sit there a few days.

This is known as a "Back Door Roth IRA" contribution.

Just google that to get more info on the subject.


http://online.wsj.com/news/articles/SB10001424052702304104504579375432214126664

I can't read the WSJ article to see if it warns you about doing this if you have other traditional IRA money already. This does have the warning:

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

MoneyTree

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Re: Is LC & Prosper interest considered Passive Income by the IRS?
« Reply #5 on: May 16, 2014, 02:56:09 PM »
You can "legally" beat the Roth IRA income limits by making a after tax contribution to a Traditional IRA and then immeidately, like the next day, converting it to a Roth IRA.  Do it immediately to avoid earning income on the $6,500 Traditional IRA contribution which may complicate things.  Like you might try to roll $6,500.01 if you let it sit there a few days.

This is known as a "Back Door Roth IRA" contribution.

Just google that to get more info on the subject.


http://online.wsj.com/news/articles/SB10001424052702304104504579375432214126664

Thanks for the tip. Unfortunately, since I already have a regular (non-ROTH) IRA, using the back door technique will generate additional taxes (due to the requirement that the tax basis for the rollover be based on ALL IRA funds), as well as complicating the treatment of withdrawals from my IRA in the future (which currently has only pre-tax dollars in it).