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Questions:

  • Is this considered a contribution subject to things like yearly Roth contribution limits?
  • Is there any special tax treatment? Such as the cash bonus in regular IRA becoming after-tax dollars?

Background: I recently moved a traditional IRA and a Roth IRA from my previous brokerage to Merrill Lynch. The offer included a cash bonus in both IRAs, deposited after 90 days.

The transactions in my Merrill account have a description "Other Income" and the Type field is "Dividends/Interest". To me, this implies no 1099's would be generated since these look like dividends in tax-deferred accounts.

My interweb searching only got me one useful hit at https://www.doctorofcredit.com/merrill-edge-brokerage-up-to-900-cash-bonus-for-moving-over-your-investments/ buried in the comments was: "At Merrill Edge, and most brokerages, a bonus paid into an IRA is like investment returns, not a contribution, and not taxable (apart from that for a Trad IRA you pay tax when you withdraw, but that’s just like any other returns within Trad IRA)." But this is some random internet person, not the financial wizards of Stack Exchange.

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The website you found is perfectly right. A bonus deposited into an IRA by Merrill Lynch (paid in this instance as an inducement to transfer an existing IRA with different custodian to Merrill Lynch) is just an additional gain in the IRA investments. The bonus has no current tax consequences; it need not be reported to the IRS either by you or by the IRA custodian. Your IRA investment just did better than if you gad stayed with the previous custodian or transferred the account to another custodian who is not offering the bonus. There are, of course, tax consequences later when the money in the Traditional IRA is distributed (no consequences for Roth IRA accounts) in that income taxes would have to paid (and possibly penalties for early distribution) but that is a different matter.

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