Can I fund existing IRA with brokerage cash via bank

Forum|Forum|5 years ago
March 20, 2021
16 replies
128 views

Question on funding an existing IRA (rolled-over 401K from a previous employer).

I understand a brokerage account isn't a qualified retirement plan so I cannot do a direct transfer, but I would still like to use its cash to fund the IRA with a tax deductible 2020 contribution.

Is it allowed to:

Step 1 Move cash from the Brokerage to my bank account;

Step 2 Move that cash from the bank account to the IRA?

I think "yes" but I can't find a definitive answer and the last thing I want is get into trouble with a three letter acronym government agency... Thanks much in advance!

Best answer by macuser_22

See IRS publication above. Social Security, Interest and Dividends cannot fund a IRA contribution . Only money from the listed activities (mainly W-2 income or net Self-employed income) can fund an IRA.

Since money is fungible it does not matter what account it comes from as long as you have at least that amount of taxable compensation - on the 1040 line 1 (W-2) or Schedule 1 line 3 (Self-employed - line 14).

Otherwise it will be an excess contribution subject to penalty that repeats every year until the excess is removed.

macuser_22

Alumni - Champ

You must have the IRA custodian make the contribution to your IRA. The administrator must report it to the IRS. Ask the account administrator for the methods you can use.

It does not matter where the money comes form as long as you have sufficient taxable compensation (money that you worked for) on your tax return.

The maximum IRA contributions for 2020 is $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year which ever is less.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible 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

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

pkrabbendamAuthor

Level 2

Thanks for that very fast response @macuser_22 !!

For clarification, I am already retired so my income is from Social Security, Interest and Dividends.

Both the IRA and Brokerage are self-directed. When I go to Transfer Cast option on their website and select my bank account in the From list and the IRA account in the To list it shows a box where I can specify the contribution to be for 2020 or 2021, and contributions to date, so I interpret this as being a valid funding method since in fact I am instructing the account administrator (Merrill) to do the needful, correct?

macuser_22

Answer

Alumni - Champ

Otherwise it will be an excess contribution subject to penalty that repeats every year until the excess is removed.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

TuckerdogAVL

Level 6

I have a similar question. I thought it may help to ask here vs. starting a new thread. I recently sold some holdings in my 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? I will be 68 at the end of this year if that matters.

macuser_22

Alumni - Champ

@TuckerdogAVL wrote:

I have a similar question. I thought it may help to ask here vs. starting a new thread. I recently sold some holdings in my 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? I will be 68 at the end of this year if that matters.

No. That is not "taxable compensation" as defined in IRS PUB 590A as stated in my answer above.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**