I’m 65 and have SEP IRA contributions from 2017 that will become long term on April 12th. Can I use it to fund 2018 by doing a w/d and then contributing back for 2018?

[TuckerdogAVL]

I’m sure this is rather unorthodox but that’s why I need your help. I’m wondering if rather than sell stock shares and pay tax on the cap gains (over cost basis) in 2020, I withdraw funds from an existing SEP IRA to fund 2018 SEP contribution? In order to fund an IRA and a SEP IRA and still pay taxes against pension and our soc security, I have to amass the funds by selling stock.  The SEP contribution will be about $2500 and that’s sitting in a money market in the sep (that becomes long term 4/12). I’m wondering if it’s better to just use that than sell anything. Any thoughts? 

[MinhT · Accepted solution]

Doing this will not help your taxes as the withdrawal from your SEP IRA will be taxable in 2019 although there may be no early withdrawal penalty. You will only shift the taxation of the withdrawal from 2018 to 2019.

[TuckerdogAVL]

Well, that's sort of the point. To shift. If I sell something I'll pay taxes on it anyway ... so I'm trying to figure out what may be more beneficial. It's sort of like where people think they are getting a big thing from a tax refund. I look at tax refunds as something you did wrong and gave the government too much money for the year. I'd rather have that money working for me for a year then pay as little as possible. Thus, the question: Better to keep the funds working for me and use the MM money that is just sitting there (like a savings account)? Or sell something that I will pay taxes on next year anyway based on cost basis. (or, is that sale of stock not taxed?) Thanks. I await your response.

[MinhT]

If I understand correctly, your option is: 1. Not taking a distribution from your SEP IRA and not contributing to your SEP IRA this year OR 2. Taking a distribution of $2,500 taxable in 2019 and contributing that amount this year to get a tax break. Supposing your marginal tax rate is 22%, your tax savings this year is $550 which you will repay in extra tax next year. If you invest that $550 on the money market at say 2%, your gain would be $11. The decision is yours!

[dmertz]

In addition to what TurboTaxMinhT said, investments held in an IRA, including your SEP-IRA, are not subject to capital-gains treatment.  They do not have a capital cost basis or capital holding period.

If you distribute the shares in-kind from the IRA, the cost basis and starting date for the holding period are established on the date of the distribution.  On that date the cost basis will be the FMV distributed and the shares will be short-term until one year has passed from the date of the distribution from the IRA.