Helping poor elders with finance. Appreciate thoughts.

[BogleMelon]

I am currently helping elders (married) couple with their personal finance and taxes. Due to their current immigration status, they can't get Medicaid, Medicaire, SS, SSI or any most of the government aid programs. They can however work legally as they have SS and green card.
The man is working a blue collar job, and the couple's income in 2020 is supposed to get them into the 12% bracket due to pandemic unemployment they got earlier this year.
I am then trying to make some legal tax efficient moves for them, specially they live in HCOL and they can barely meet their needs (moving is not an option now).
They have ACA so at least the medical part is covered
My plan:
1. the man (67 years old) can contribute up to 40% of his income to his 401K plan for the remainder of this year. No matching yet for him, but at least that would reduce his taxable income this year. He can then withdraw that amount next year when he is in 0% effective tax rate (the plan allows in-service withdrawals)

2. When filing taxes (around Feb 2021), I will see if he still has assets to open and contribute to IRA for the tax year 2020. If so, I will let him do that to decrease his tax bill further.

Questions:
Is that a good plan? Am I missing something?
Also, if he contributed to an IRA (for the tax year 2020) right before filing taxes, can he withdraw the money the next day (and make it taxable for the year 2021) since he will probably need it? In other words, is there a law or regulation prohibiting someone to contribute to (last year) IRA only to withdraw it in the (current tax year) the next day (income shifting)?

[Watty]

Am I missing something?

One thing that they you should check on is to see if they can get a Retirement Savings Contribution Credit of up to $1,000 each.

https://www.irs.gov/retirement-plans/pl ... ers-credit

You need to read through all the details and it would be good to fill our a dummy copy of the form for it to see how it works. The income numbers on that website are after adjustments so it will be different than their salary.

As I recall it also looks back to see if your have made IRA withdrawals.

[tashnewbie]

Also, if he contributed to an IRA (for the tax year 2020) right before filing taxes, can he withdraw the money the next day (and make it taxable for the year 2021) since he will probably need it? In other words, is there a law or regulation prohibiting someone to contribute to (last year) IRA only to withdraw it in the (current tax year) the next day (income shifting)?

You can always withdraw direct IRA contributions at any time, tax- and penalty-free, but not earnings.

[SmallSaver]

Good for you for helping these folks out with their many challenges. I do have to ask though, are taxes really the problem here? It sounds like paying 12% on a few marginal dollars probably isn't the make or break for them.

[Dottie57]

Agree with above. How will these people be able to live with just 60% of gross? Isn’t 40% contribution amount excessive? Looking for tax breaks is great for people with enough income.

[Katietsu]

You will need to consider how their income affects their ACA subsidy. Too little income can disqualify them just like too much income.

[BogleMelon]

Agree with above. How will these people be able to live with just 60% of gross? Isn’t 40% contribution amount excessive? Looking for tax breaks is great for people with enough income.

From money saved while getting pandemic unemployment.

[gr7070]

I'd encourage some significant effort determining any/all appropriate low income benefits possible - housing assistance, food assistance, churches, other private charities, food banks, etc.

[BogleMelon]

Am I missing something?

One thing that they you should check on is to see if they can get a Retirement Savings Contribution Credit of up to $1,000 each.

https://www.irs.gov/retirement-plans/pl ... ers-credit

You need to read through all the details and it would be good to fill our a dummy copy of the form for it to see how it works. The income numbers on that website are after adjustments so it will be different than their salary.

As I recall it also looks back to see if your have made IRA withdrawals.

Awesome! Thanks for bringing that to my mind.

[Katietsu]

I certainly not an expert on immigration status, but I would make sure some of the things that they may have told you are verifiable. Some immigrants are afraid to accept benefits that they are eligible for. [Edit: I am guessing they recently became green card holders and have not yet met the waiting period for some of these benefits.] Green card holders should be eligible for medicaid. And once they have enough years of work experience, they should get medicare and social security.

And at 67, they should look into benefits offered by the state like free prescription drug coverage or food vouchers. Do they qualify for heating bill assistance? Look for an Area Agency on Aging for their city or county as a starting point for possible benefits.

[BogleMelon]

Also, if he contributed to an IRA (for the tax year 2020) right before filing taxes, can he withdraw the money the next day (and make it taxable for the year 2021) since he will probably need it? In other words, is there a law or regulation prohibiting someone to contribute to (last year) IRA only to withdraw it in the (current tax year) the next day (income shifting)?

You can always withdraw direct IRA contributions at any time, tax- and penalty-free, but not earnings.

Traditional IRA withdrawal won't be tax free, since contributing the money will reduce your AGI

You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income

https://www.irs.gov/retirement-plans/re ... ithdrawals

[tashnewbie]

Also, if he contributed to an IRA (for the tax year 2020) right before filing taxes, can he withdraw the money the next day (and make it taxable for the year 2021) since he will probably need it? In other words, is there a law or regulation prohibiting someone to contribute to (last year) IRA only to withdraw it in the (current tax year) the next day (income shifting)?

You can always withdraw direct IRA contributions at any time, tax- and penalty-free, but not earnings.

Traditional IRA withdrawal won't be tax free, since contributing the money will reduce your AGI

You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income

https://www.irs.gov/retirement-plans/re ... ithdrawals

Yes. I should've clarified that my statement was applicable to Roth IRA contributions, not contributions for which you've received a deduction, such as a traditional IRA.

ETA: Nice work going directly to the source. You've answered your own question. There seems to be nothing that would prohibit someone from withdrawing a TIRA contribution that they deducted, immediately after filing their tax return.

[Katietsu]

One possible way that the contribution to the IRA followed by the withdrawal could get messed up is if it is mistakenly done as a return of contribution. For example, I can make a 2020 contribution on February 12, 2021 for tax year 2020. Then, I can decide on February 20, 2021 that I changed my mind and want a return of my contribution. From a tax perspective, this makes the contribution as if it never happened (sort of).

So, you need to be careful that, if you execute your plan to contribute and withdraw, that the withdrawal is just done as an ordinary 2021 withdrawal.

[BogleMelon]

One possible way that the contribution to the IRA followed by the withdrawal could get messed up is if it is mistakenly done as a return of contribution. For example, I can make a 2020 contribution on February 12, 2021 for tax year 2020. Then, I can decide on February 20, 2021 that I changed my mind and want a return of my contribution. From a tax perspective, this makes the contribution as if it never happened (sort of).

So, you need to be careful that, if you execute your plan to contribute and withdraw, that the withdrawal is just done as an ordinary 2021 withdrawal.

How could that mess up happen? Or in other words, how to make sure that the withdrawal is ordinary 2021 withdrawal and not anything else? The IRA will be at Fido if that matters... Thanks!

[Dottie57]

Agree with above. How will these people be able to live with just 60% of gross? Isn’t 40% contribution amount excessive? Looking for tax breaks is great for people with enough income.

From money saved while getting pandemic unemployment.

So this is a temporary band aid, not permanent change.

[Katietsu]

One possible way that the contribution to the IRA followed by the withdrawal could get messed up is if it is mistakenly done as a return of contribution. For example, I can make a 2020 contribution on February 12, 2021 for tax year 2020. Then, I can decide on February 20, 2021 that I changed my mind and want a return of my contribution. From a tax perspective, this makes the contribution as if it never happened (sort of).

So, you need to be careful that, if you execute your plan to contribute and withdraw, that the withdrawal is just done as an ordinary 2021 withdrawal.

How could that mess up happen? Or in other words, how to make sure that the withdrawal is ordinary 2021 withdrawal and not anything else? The IRA will be at Fido if that matters... Thanks!

I do not use Fidelity. But generically, that could happen if I call my brokerage and tell them I want assistance withdrawing that $5000 that I put in my IRA last week. And they kindly direct me down a path for a return of contribution.

Just do an ordinary IRA withdrawal. Leave out any reference to the contribution. They just want to make a withdrawal from the IRA. Should be unnecessary to do anything else, though my paranoid side would probably make the withdrawal for a different amount than the contribution.

[KlangFool]

OP,

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KlangFool

[Tamarind]

You will need to consider how their income affects their ACA subsidy. Too little income can disqualify them just like too much income.

This needs repeating, OP. If they are on ACA you need to make sure you don't take their income below 100% of poverty level. Or else they will have trouble when trying to get next year's insurance because the system will think they should be on Medicaid.

For additional tax topics, don't forget the effect of ACA credit calculations in reducing their taxable income. And don't forget to see if they after eligible for the EITC.

[BogleMelon]

You will need to consider how their income affects their ACA subsidy. Too little income can disqualify them just like too much income.

This needs repeating, OP. If they are on ACA you need to make sure you don't take their income below 100% of poverty level. Or else they will have trouble when trying to get next year's insurance because the system will think they should be on Medicaid.

For additional tax topics, don't forget the effect of ACA credit calculations in reducing their taxable income. And don't forget to see if they after eligible for the EITC.

My understanding is that ACA credit are just credits. They don't affect taxable income, but taxable income is what affecting the ACA credit!

[earlyout]

You will need to consider how their income affects their ACA subsidy. Too little income can disqualify them just like too much income.

This needs repeating, OP. If they are on ACA you need to make sure you don't take their income below 100% of poverty level. Or else they will have trouble when trying to get next year's insurance because the system will think they should be on Medicaid.

For additional tax topics, don't forget the effect of ACA credit calculations in reducing their taxable income. And don't forget to see if they after eligible for the EITC.

EITC is not available to people over age 65.