Title says it all, really. The inheritance, from my parents, is small enough that it is not subject to taxation. Since the money is not income and not subject to taxation, can I use it to contribute to a Roth IRA without paying taxes on it? Is it equivalent, for this purpose, to after-tax income?
I don’t know what other factors might be relevant to the answer, but I will say that I am married and I live in California.
I don’t see why you couldn’t use it, it’s your money. However, contribution to a Roth IRA aren’t deductible.
Contributions to a traditional IRA, on the other hand, are tax deductible. I’m not sure if that’s what you meant, but if you did that, you’d be deducting untaxed income.
This gets over my head, but I don’t see why it would be an issue, it’s your money, right? If there was an issue, couldn’t it be shown that you didn’t contribute the inheritance, you contributed your own money (assuming you work and make at least that much money).
In that respect, it would probably be wise to have they money pass through a personal account (checking/savings) and not deposited directly into the brokerage account.
An IRA has a yearly maximum of like $6000 that you can contribute. You can’t just drop it all into an IRA at once. But you can trickle it in over the years.
One thing to remember is that you don’t have to pay taxes on the inheritance itself no matter what you do with it. If you invest it, you only have to pay taxes on the growth. So if you have $100k as an inheritance, invest it, and end up making $10k profit, you only pay taxes on the $10k. You don’t have to pay taxes on the $100k base from the inheritance.
So what you could do is put the inheritance in a savings account, CDs, stocks, etc and let the money grow that way. Each year, roll $6k into your IRA. You’ll have to pay taxes on whatever increase it makes, but that’s taxes on the profit, which is money you didn’t have before. Sometimes people think you have to pay taxes on the whole investment (e.g. $110k) rather than just the profit (e.g. $10k).
The only issue here is whether you have earned income in the amount of your Roth IRA contribution. You cannot contribute to a Roth IRA if you do not have earned income, but the actual source of the money going into the IRA is not relevant.
2019 contribution limits:
$6,000 up to age 50
$7,000 if 50 or over
Note that you can make 2018 contributions until Apr. 15, 2019, but the limits are lower: $5,500 and $6,500.
I am well over 50, so that’s something. But it’s disappointing that I can’t throw the whole thing in there, sort of set it and forget it (for a while).
Frankly, knowing me, I’m afraid that having that much liquid assets will tempt me to spend it on stuff I don’t need. So maybe, after putting in the first $7K, I’ll buy a string of CDs, each one for $7K, one that expires after 1 year, one after 2 years, and so on, to the total amount of the inheritance. If I have a financial emergency, I can draw out of the Roth IRA. If not, it will grow by $7K per year for a few years.
If you have the money now, you should definitely set the Roth IRA up before April 15 to take advantage of your 2018 contribution space. You could then put in a total of $13,500 - $6,500 for 2018 and $7,000 for 2019. Just be sure to choose the right years when depositing to the Roth IRA.
Note that you can only contribute to an IRA of any kind up to your earned income.
So, did/will you earn at least $6,500/$7,000 last year/this year?
Posters who note the earned income limitation are right. You can’t contribute more to a Roth IRA than you earned for any tax year. There are also income limits. If you are married, filing jointly, and have modified adjusted gross income less than $189,000 per year, you won’t have to worry about the contribution limits. The inheritance isn’t income for these purposes. If you and your wife have modified, adjusted gross income over $189,000, message offline for more advice.
I also agree with posters who say to contribute for 2018 before April 15. You can make your 2019 contribution at the same time, effectively doubling your initial contribution. You and your wife can each set up accounts even if one of you does all the earning.
There’s also no reason you can’t invest the rest of the money in a taxable account. Essentially, any place that will take your Roth IRA money will take taxable investments too.
If you need ideas where to invest, I like Vanguard. I’d need to know more about you and your goals to make specific recommendations.
I don’t have the money now, and probably won’t before April 15th. Sad.
Yes, we will have earned more than $7K income in 2019 (and 2018 if that comes to pass).
No, we haven’t exceeded the earnings limits (worse luck) for either year that would prevent us from contributing to an IRA.
My investment goals are more or less to put the money where it will earn a reasonable interest (better than inflation) and not to pay too much for the privilege; my regular IRA is invested in socially-responsible investment funds, and I would like to continue that with any Roth IRA I open, although with a different company. I’m open to Vanguard as well as any other similarly inexpensive outfit. I assume and believe that there are SRI mutual funds that I could invest in so I don’t have to bother about specific companies.
Thanks for all the input so far.
Have you already made an IRA contribution for 2018? If so, you may not be able to contribute anything at all to a Roth IRA. The IRA contribution limits apply to the total that you contributed to a Roth IRA and a regular IRA. Based on what you’ve said so far, you can contribute only $6500 total in any combination of regular or Roth IRA for 2018 (and $7000 for 2019). So, if you already made your maximum 2018 contribution, you can’t contribute any more for that year.
I don’t know much about SRI funds so i don’t have much to suggest but if you are happy with your IRA, you could consider making a taxable investment on the same fund. This may not be ideal for a number of reasons (cost, tax efficiency, diversification, time horizon, objective) but it’s a thought.
I’m retired so I’m not contributing to my regular IRA any more, in fact I’m close to the point where I will have to take minimum required withdrawals (the unspent excess of which I am also considering putting into the Roth IRA, which also complicates things a bit).
I don’t want to use the same investment firm for a variety of reasons, if only not to have all my funds in one place. Aside from the house, the regular IRA is about 95% of my net worth.
I’d put it in a modest growth mutual fund. Or, if I listened to the pundits who predict an economic downturn in the next 2 or 3 years, I’d consider putting it in a CD or equity-indexed annuity.
Is the inherited money currently in an IRA? If so, you can roll over the entire amount into an “Inherited IRA”.
Something else to note, IRAs involve choosing how to invest the money, just like the stock market. And, just like the stock market, you can lose money.
Depending on your age, the amount of money and your ability to pick stocks/funds, you might be better off just sticking the money in a high yield savings account, CDs or even just buying some savings bonds.
That is, investment vehicles the money (or at least the original investment) safe and accessible.
Sadly, no.