Invest inherited dollars for one month to defer taxes?

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Topic Author
bradypas
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Joined: Fri Mar 29, 2013 12:41 pm

Invest inherited dollars for one month to defer taxes?

Post by bradypas » Mon Dec 02, 2019 7:40 am

I am (essentially) retired and received a $50k inheritance in the form of a distribution of an IRA (distributed to me as cash by the estate). I received a 1099 and expect to have to report this as ordinary income. My goal is to defer as much of this as possible. I have $15k in W2 earnings.

My question is - are there any reasons why I couldn't/shouldn't contribute $15k to an IRA (up to my 2019 earnings, though I'd like to do more if allowed), thus deferring taxes on $15k of my income this year and lowering total taxable income across the two years? I need the money come early next year, so I plan to contribute to an IRA within Vanguard, leave in money market to not put at-risk, then withdraw Jan 1 and report that $15k of income in 2020's taxes. In short, I would contribute to the IRA and withdraw one month later, pushing income from 2019 to 2020.

Are there any holes in my plan or IRS rules that I haven't come across disallowing the contribution/withdrawal within a short time period?

Thank you!

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dodecahedron
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Re: Invest inherited dollars for one month to defer taxes?

Post by dodecahedron » Mon Dec 02, 2019 7:52 am

If you have $15K in earnings, you can contribute $7K to an IRA for yourself and if you are married $7K to an IRA for your spouse. (Since you said you are essentially retired, I am assuming you are over 50. If either of you are not yet 50, you need to knock $1,000 off that person´s contribution.)

However, the contribution(s) may or may not reduce your 2019 taxable income. If you and/or your spouse are covered by employer plans, you might face a MAGI limit on your total household income to qualify to deduct the tIRA contribution from your income. But assuming you meet the income limits to deduct tIRA contributions in 2019, you could certainly convert to a Roth in 2020, thereby moving income across tax years.

Also there is no big rush. You have until April 15 to contribute money to an IRA for 2019.

HomeStretch
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Re: Invest inherited dollars for one month to defer taxes?

Post by HomeStretch » Mon Dec 02, 2019 7:55 am

A $15k IRA contribution is above the 2019 contribution limit. If you are eligible, a deductible 2019 IRA contribution up to the limit ($6k or $7k if age 50+) would reduce 2019 income. If you are < age 59-1/2, any withdrawal of IRA funds in 2020 will be subject to a 10% penalty.

inverter
Posts: 175
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Re: Invest inherited dollars for one month to defer taxes?

Post by inverter » Mon Dec 02, 2019 8:05 am

So you elected to have the IRA distribute instead of receiving the IRA? Otherwise I’m confused as to how you would owe taxes.

Gill
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Location: Florida

Re: Invest inherited dollars for one month to defer taxes?

Post by Gill » Mon Dec 02, 2019 8:23 am

Did you receive the distribution from the estate or from the IRA?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

retiredjg
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Re: Invest inherited dollars for one month to defer taxes?

Post by retiredjg » Mon Dec 02, 2019 8:35 am

If you go ahead with this plan, you need to be over age 59.5 next year to take the money out of the IRA without penalty.

Topic Author
bradypas
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Joined: Fri Mar 29, 2013 12:41 pm

Re: Invest inherited dollars for one month to defer taxes?

Post by bradypas » Mon Dec 02, 2019 6:46 pm

Thank you for the replies, very helpful! To answer a few questions:

1 - The distribution was from the estate but I was told by the executor that I will owe taxes on the distribution and will receive a 1099 for the money received, causing me to pay ordinary taxes on it. I did not have a choice to inherit the IRA. It was cashed and distributed to me and my siblings equitably.

2 - Yes, my wife and I are over 50, so I will contribute $7k for me and $7k for her.

3 - Yes, I am over 59 1/2 but my wife is not. Am I correct in understanding that I can withdraw the contribution a month later at no penalty, but my wife could not as she is under 59 1/2? My main concern is the one-month lag between my portion of the contribution and withdrawal and whether there are tax implications with that (assuming no gain on the investment).

4 - Neither my spouse nor I am covered by employer plans and would not hit the MAGI limit.

retiredjg
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Re: Invest inherited dollars for one month to defer taxes?

Post by retiredjg » Mon Dec 02, 2019 6:56 pm

Will your wife be 59.5 during 2020?

retiredjg
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Re: Invest inherited dollars for one month to defer taxes?

Post by retiredjg » Tue Dec 03, 2019 8:25 am

bradypas wrote:
Mon Dec 02, 2019 6:46 pm
3 - Yes, I am over 59 1/2 but my wife is not. Am I correct in understanding that I can withdraw the contribution a month later at no penalty, but my wife could not as she is under 59 1/2?
That's how it appears to me. However, if your wife will be 59.5 during 2020, there would be no penalty.

My main concern is the one-month lag between my portion of the contribution and withdrawal and whether there are tax implications with that (assuming no gain on the investment).
I can't think of any.

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