Question about IRAs and taxes?

GracieB

Mouseketeer
Joined
Aug 9, 2000
I was told by a friend that she gets several huge checks a year (probably over $35,000 yearly) from her wealthy dad. She says that in order to avoid being in a higher tax bracket by just depositing them into her savings, that she instead deposits them into an IRA. She claims she saves on taxes this way. Isn't this incorrect?
 

cedricandsophie

DIS Veteran
Joined
Apr 8, 2014
Anything over the annual amount for tax free gifts, 12000 or 13000 now?, is supposed to be subject to gift tax on the part of the giftor. So it shouldn’t be taxable to her anyway. But I’m no accountant just going by our financial advisor.
 
  • cvjw

    DIS Veteran
    Joined
    Dec 22, 2005
    If she has a wealthy mom, she can legally get double the yearly allowance tax free. Google just said it is $15,000 per person, so $30,000 legally tax free from mom and dad per year.

    Sounds like she is in the clear, or pretty close amount wise. Not sure about the ira limits :)
     
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    GracieB

    Mouseketeer
    Joined
    Aug 9, 2000
    If she has a wealthy mom, she can legally get double the yearly allowance tax free. Google just said it is $15,000 per person, so $30,000 legally tax free from mom and dad per year.

    Sounds like she is in the clear, or pretty close amount wise. Not sure about the ira limits :)
    No mom, wealthy or otherwise.
     

    Kestryl

    Mouseketeer
    Joined
    Mar 29, 2019
    The IRA limit is $6000 this year ($7000 if you’re above 50). That’s not per IRA- that is total per person. If she’s exceeding that, she’s going to pay an excise tax on the overage amount- 6% every year.
     
  • QueenIsabella

    DIS Veteran
    Joined
    Jan 17, 2016
    Yeah, she needs to talk to a financial professional. The gifts may or may not trigger gift taxes/exclusions, but that's on her dad. IRAs have contribution and income limits. If she reaches her IRA limits, she can look at other investments for this money. They aren't tax-advantaged like an IRA, but they have the advantage of being legal. She really needs a qualified adviser looking at her "whole picture".
     

    MomToOne

    DIS Veteran
    Joined
    Mar 18, 2010
    I was told by a friend that she gets several huge checks a year (probably over $35,000 yearly) from her wealthy dad. She says that in order to avoid being in a higher tax bracket by just depositing them into her savings, that she instead deposits them into an IRA. She claims she saves on taxes this way. Isn't this incorrect?
    There are a lot of missing details in this:
    1. What is the source of the money? Is she a "silent partner" in some sort of business that her father has, or something else along those lines? Or is there a trust setup by her father that the money is actually coming from, and not directly from her father? The fact that she thinks it would add to her taxes indicates it is something other than a traditional gift.
    2. Is she self employed? She could deposit up to $53000 of income into a SEP IRA if she is. If she's not self employed, then depending on her other income, she could deposit a portion of the money into a traditional IRA (up to $7000 depending on age) or simple IRA (up to $16000) if her employer has one to possibly save on taxes. And if she files jointly with her husband, she could also deposit some into an IRA for him to save even more. What is her income level without this money? Did she state she deposits all of it into an IRA, or was she maybe referring to just depositing some of it? Was she referring to saving on taxes in the year she receives the money, or was she possibly referring to depositing it into an IRA to save on future taxes?

    If I had to hazard a guess, I would say this is has to do with a family business or a trust, and she is utilizing something like a SEP IRA. But that's based on a whole lot of guessing.
     
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  • GracieB

    Mouseketeer
    Joined
    Aug 9, 2000
    There are a lot of missing details in this:
    1. What is the source of the money? Is she a "silent partner" in some sort of business that her father has, or something else along those lines? Or is there a trust setup by her father that the money is actually coming from, and not directly from her father? The fact that she thinks it would add to her taxes indicates it is something other than a traditional gift.
    2. Is she self employed? She could deposit up to $53000 of income into a SEP IRA if she is. If she's not self employed, then depending on her other income, she could deposit a portion of the money into a traditional IRA (up to $7000 depending on age) or simple IRA (up to $16000) if her employer has one to possibly save on taxes. And if she files jointly with her husband, she could also deposit some into an IRA for him to save even more. What is her income level without this money? Did she state she deposits all of it into an IRA, or was she maybe referring to just depositing some of it? Was she referring to saving on taxes in the year she receives the money, or was she possibly referring to depositing it into an IRA to save on future taxes?

    If I had to hazard a guess, I would say this is has to do with a family business or a trust, and she is utilizing something like a SEP IRA. But that's based on a whole lot of guessing.
    She isn't self employed. The money is just an ongoing gift. I don't know her level.
     

    gottalovepluto

    DIS Veteran
    Joined
    Jul 14, 2014
    She isn't self employed. The money is just an ongoing gift. I don't know her level.
    It sounds... complicated. It also sounds like maybe someone else handles her tax situation and just gives her the bottom line: because you’re putting it in an IRA you don’t pay taxes! (In that case unless she reviews her taxes she might not even realize she is “self-employed” with a “business” and that’s how and why she’s able to put gobs of money into an IRA.)
     

    _19disnA

    DIS Veteran
    Joined
    Aug 8, 2018
    The OP didn't provide much to go on, so a lot of the comments above include speculation. IF she is simply saying that putting money into an IRA means she pays less tax now then on income from a savings account, that would be correct (that is part of the tax benefit of an IRA). The income from a bank savings account is unlikely to put someone into a 'higher tax bracket'. Depositing money into a bank savings account is not counted as income. The IRA does limit how much you can deposit annually and they don't ask the source of those funds. There will be tax implications when she eventually starts withdrawing funds from an IRA. As others have stated, the giver is more likely to have current tax implications, but without more detail we can't provide much more useful information.

    Friends may also exaggerate things to do with their financials, so I wouldn't necessarily assume what she is saying is totally accurate.
     
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