Can I fund next year's traditional IRA contribution with cash in the mm account in that IRA?

[TuckerdogAVL]

I recently sold some holdings in my traditional IRA account that are underperforming. I have enough cash in the IRA now where I could fund 2022 Contribution. Can I use some of that cash to fund my 2022 contribution without penalty? or taxes (ie it being treated as a withdrawal). I will be 68 at the end of this year, so we're not talking about 59 1/2 or RMDs (which is all I can find online... I'd say, 80% of info on IRAs is about early w/d and RMDs) 

[VolvoGirl · Accepted solution]

No, of course not.   It's already in the IRA. I really didn't follow what you are trying to do.   What would be the point?  Are you trying to get a tax deduction for it?

You can only contribute to a IRA from earned income like from W2 or self employment income.  From personal money outside your IRA.   

[TuckerdogAVL]

Well, since the cash was already there I was thinking, Okay this would be simple since the account has a button that says "You haven't contributed for next year yet. Click here." 🙂 I didn't think it made sense which is why I've been trying to get an answer to this question for the last hour. Yes or No is often the most difficult thing to get online. Thank you for your quick response.  However, on a side note, I could take the cash out, have it count as income to be taxed at whatever my tax rate is, and then put it back in though, correct? 

[VolvoGirl]

I guess so if you have enough earned income to make a contribution.   It doesn't matter what account (non-IRA account)  you use to fund a new Contribution.   But that really doesn't make sense to take a withdrawal and pay tax on it just to turn around and send it back as a contribution.   Are you still working?

[VolvoGirl]

@macuser_22   thoughts?   He also posted on another thread you were on....

https://ttlc.intuit.com/community/retirement/discussion/can-i-fund-existing-ira-with-brokerage-cash-... 

[macuser_22]

You can only fund an IRA contribution with taxable compensation.  Income from selling securities is NOT taxable compensation.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deducible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2020_publink1000230355

[TuckerdogAVL]

Yes, I still have freelance income, along with social security. I usually have enough income to be able to make an IRA and SEP IRA contribution. I usually end up having to fund at the last minute... It would probably make more sense to wait until 2022 to fund it since the tax I would pay on the withdrawal would then be in 2023 I assume. The problem is any additional funds throughout the year come from sales of securities which are all taxed of course. Just looking for ways to minimize the tax and stay under thresholds if possible. Thanks for your assistance. 

[TuckerdogAVL]

Yes, I found the other thread first and then jumping through the hoops and hurdles found the way to ask directly. Thank you both for your responses. 

[macuser_22]

---

@TuckerdogAVL wrote:

Yes, I still have freelance income, along with social security. I usually have enough income to be able to make an IRA and SEP IRA contribution. I usually end up having to fund at the last minute... It would probably make more sense to wait until 2022 to fund it since the tax I would pay on the withdrawal would then be in 2023 I assume. The problem is any additional funds throughout the year come from sales of securities which are all taxed of course. Just looking for ways to minimize the tax and stay under thresholds if possible. Thanks for your assistance. 

---

Money is fungible so it does not matter which pocket you take the dollars from just so long as you have at least that many dollars from working during the year as stated above.