It’s about tax time, which is prime time to talk about contributing to an IRA with funds you already have…but may not know you have. We know this is a prevalent problem, because we get inquiries like this all the time from our clients:
“Hey, I’d really like to put $5,500 into my IRA so I can get that tax deduction…but I don’t have that money just lying around! What do I do?”
This isn’t a frivolous concern. If you’re married and filing jointly, with an income around $100,000, you’ll save a tidy $1,000 in taxes with that $5,500 contribution. But there’s good news: you DO have this money around already, even if your bank balance doesn’t reflect it, and any “extra” you have is tied up in investments or the like. You just don’t realize you have it.
So where is it?
The Hidden Value of Your 401(k)
Let’s say that you participate in a 401(k) plan with your employer, and you have $30,000 in the account; or, alternatively, you’ve set up your own IRA, to which you can contribute up to $5,500.
The key is, however, that in order to make that contribution, you have to have at least $5,500 in income from an endeavor considered an active trade or business. This is no problem, of course, if your employer pays you more than that! But you could still be “cash poor” in terms of bringing in an extra $5,500 into your retirement fund, and that’s a shame, because you’re missing out on a great tax break.
But you don’t have to miss it if you take advantage of the resources contained in your IRA.
It’s a simple process: you go to your IRA administrator and request a loan of $5,500. What you should do is this, go to your IRA administrator and ask to take out a loan in that cash amount: if it’s just you, that’ll be $5,500; if it’s you and your spouse, it can be up to $11,000 — so you can each contribute to your own IRA.
Assuming we’re in an effective rate of 20 percent, that’s $2,200 in tax savings that you’re going to get back at the end of the year. By using your pension money to make an IRA contribution, you just put $2,200 back in your pockets!
But What If the Money Is In My Business?
That’s a good question. You may be thinking, “Clint, if I put $11,000 into these IRAs, I won’t have it in my 401k to invest with anymore.” That much is true; but that withdrawal and contribution doesn’t have to be cast in stone, either: you can roll that money OUT of your IRA and back into your 401k. There’s no regulation or tax code that will prevent you from doing this. So you can get a tax break AND have the potential to still have money available to invest back in your 401k.
“Check” It Out
At this time of year, we can all use good news, right? A tax break of $1,000 or more is definitely good news: you just need to know where the funds can come from to make it happen. This “extra” IRA or 401(k) contribution can come, seamlessly and painlessly, from your retirement plan. Take out a loan, use those funds to make the contribution, and pick up a nice tax reduction before you file your tax return. Questions? Come see us at Anderson. We’ll lay it out simply, and you’ll come out with more money in your pocket!