IRA contribution

[Taxadvisor VA]

TP wants to make a traditional IRA contrbution for tax year 2014. Yesterday, I met with him and his spouse to prepare their tax return. At the conclusion, we discussed their need to take a IRA distribiution in 2015 to accomodate their living needs. Both TP & SP are older than 59 and 1/2 so no premature penalty just ordinary income rates would apply. We then checked to see the implications for 2015 with this additional taxable income.

Ok... discussion moved toward TP taking $4K from this IRA distribution (SP- IRA) and make a contribution into his own IRA for 2014 to reduce some of his tax liability. Instant return of 20.75%. At first, I thought that could be a problem and then I thought:
1) They certainly had earned income to make the contribution.
2) The SP was in a 401K plan but not the husband.
3) Their joint income was below the $96K threshold to make a traditional IRA contribution when you are already in a retirement plan.
4) I'm pretty sure since the source of funds did not come from the husband's already existing IRA that this might just work. How would this be any different then depositing the $4K in a savings account one day and the next day making a 2014 IRA contribution before the 4.15.15 deadline?

Does this sound like a legal IRA contribution?
Thanks for anyone's input.
Taxadvisor VA

[kathyc2]

Absolutely legal. As long as TP otherwise qualifies to make a 2014 contribution the source of where the money comes from does not matter.

[Roland Slugg]

It's a good plan and a perfectly legal one. Any time an IRA owner can withdraw funds from his IRA tax-free, he should definitely do it! Then either keep it or roll it into a Roth IRA. I recommend this to several clients every year, but very few ever do it.

Another cute trick people can do is this:

Take a distribution from an IRA, in March or April, in order to fund an IRA contribution deducted on the prior year's tax returns. The distribution becomes income on the 2nd year's returns, of course, so sometimes the people have to do this every year just to stave off a double-up ... a year with IRA income and no IRA deduction. It's kinda like sweeping dirt under the rug. Eventually, something's gonna give. This ploy works best when year #1's tax bracket is higher than year #2's.

[Taxadvisor VA]

IRA contribution

Absolutely legal. As long as TP otherwise qualifies to make a 2014 contribution the source of where the money comes from does not matter.

Agreed! Thank you for your response!