Author Topic: Case Study - Anything Wrong With This Plan??  (Read 5685 times)

jka468

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Case Study - Anything Wrong With This Plan??
« on: November 12, 2014, 01:25:10 PM »
I'm a mid-20s mustachian that has just realized that I can't take a tax deduction if I open up an IRA, as I make too much money. While this year I only contributed to a Roth 401k to maximize employer match, even if I fully contributed to my traditional 401k I still would have been unable to deduct a traditional IRA from income taxes, as the tradtional 401k wouldn't have offset enough income. So now I have an extra 10k+ cash sitting in my bank account (if you're wondering about all my other money, no, I don't spend it on hookers and blow, rather it's student loans, for which I pay about $1,500/month) and I've devised a little plan and would like to see if it works...

My parents do not contribute to any IRA accounts and between my mom (still working, no SS yet, age 66) and dad (not working, receives SS, age 70 in a week), they will earn approximately 90k this year. I've looked it up, and for a married filing jointly couple, the traditional IRA tax deduction cutoff comes at $98,000. With this in mind, I was thinking of opening an IRA under my moms name (with her blessing of course), contributing the full $6500 (since she is older than 59.5 she can put in bonus money) and then having them send me my portion of their tax return money since they will be able to deduct this $6500 from their tax burden next year.

As my mom will be retiring in a couple of years, and my parents will hence be in a lower tax bracket, she can just withdraw the funds periodically and give them back to me (and yes, I trust my mom to do this) and I'll pay their portion of the tax burden for them. As well, on the IRA she will list me as the sole beneficiary in case anything unfortunate happens in the time being.

My questions are, is this plan sound? Any legal ramifications? Anything that I am missing? Thanks in advance. 

juuustin

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Re: Case Study - Anything Wrong With This Plan??
« Reply #1 on: November 12, 2014, 01:34:25 PM »
Without actually delving into the IRC, I would suspect this violates the "substance over form" doctrine of the tax code.  Perhaps each action is legal, but taken as a whole, I doubt the IRS would be okay with people opening IRA's in other people's names and then reaping the tax deduction.  The I does stand for "Individual" after all.

jka468

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Re: Case Study - Anything Wrong With This Plan??
« Reply #2 on: November 12, 2014, 01:44:25 PM »
Without actually delving into the IRC, I would suspect this violates the "substance over form" doctrine of the tax code.  Perhaps each action is legal, but taken as a whole, I doubt the IRS would be okay with people opening IRA's in other people's names and then reaping the tax deduction.  The I does stand for "Individual" after all.

I understand your point, but as many on these boards know, loopholes are exploited all the time. This amount of money even falls under the $14,000 Gift Tax Exemption limit as well. I just suppose my mom would later be a "re-gifter".

sirdoug007

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Re: Case Study - Anything Wrong With This Plan??
« Reply #3 on: November 12, 2014, 01:53:13 PM »
Why don't you just use a traditional 401(k) which operates much like a traditional IRA?  You say you are only contributing to the match so that means you have some good room to add more.

If your income is too high for a traditional IRA (>$60k MAGI), I would highly recommend a traditional 401(k) anyways since you are paying 25% on your Roth contributions while your effective tax rate in retirement is likely to be much lower than 25%.

For the $10k, just start a taxable vanguard account to use as your first 5 year money when you ER. 

bacchi

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Re: Case Study - Anything Wrong With This Plan??
« Reply #4 on: November 12, 2014, 02:02:49 PM »
Tax fraud is seriously frowned upon by the IRS. Don't do this.

Just use a traditional 401k and save the rest in a taxable account. Having money in a taxable account is a good idea anyway.

juuustin

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Re: Case Study - Anything Wrong With This Plan??
« Reply #5 on: November 12, 2014, 02:17:48 PM »
Tax fraud is seriously frowned upon by the IRS. Don't do this.

Just use a traditional 401k and save the rest in a taxable account. Having money in a taxable account is a good idea anyway.
And the gain would be seriously negligible in the end.  Even if it is just exploiting a loophole, the cost-benefit analysis is not in OP's favor.

MDM

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Re: Case Study - Anything Wrong With This Plan??
« Reply #6 on: November 12, 2014, 03:02:33 PM »
If you want to do that for your parents, go right ahead.  The accounts will have to be theirs, and the IRS imposes no restrictions on the source of the money as long as the amount is within the rules (earned income, maximum MAGI, etc.).

But I think the posts suggesting you first maximize your own 401k are the best advice.

mlipps

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Re: Case Study - Anything Wrong With This Plan??
« Reply #7 on: November 12, 2014, 03:26:52 PM »
Why don't you just put it in a Roth IRA and then contribute to a traditional 401k & traditional IRA next year? The tax benefit will be the same across the two years that way, unless your marginal rate is higher this year.

4alpacas

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Re: Case Study - Anything Wrong With This Plan??
« Reply #8 on: November 12, 2014, 03:32:02 PM »
Why don't you just put it in a Roth IRA and then contribute to a traditional 401k & traditional IRA next year? The tax benefit will be the same across the two years that way, unless your marginal rate is higher this year.
+1

Backdoor Roth IRAs don't have any income restrictions.

Catbert

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Re: Case Study - Anything Wrong With This Plan??
« Reply #9 on: November 12, 2014, 04:36:10 PM »
+1

Backdoor Roth IRAs don't have any income restrictions.

^ Yep, do the backdoor Roth:  contribute to a non-deductible IRA and then convert to a Roth in a couple of days.  It's less convoluted than OP's plan.  Works well if you don't already have other traditional IRAs.

bearman

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Re: Case Study - Anything Wrong With This Plan??
« Reply #10 on: November 12, 2014, 05:00:14 PM »
It's only November. Marry someone by April who doesn't (yet) have a 401k through their job and make a spousal contribution to that traditional IRA :)

mlipps

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Re: Case Study - Anything Wrong With This Plan??
« Reply #11 on: November 12, 2014, 07:54:19 PM »
It's only November. Marry someone by April who doesn't (yet) have a 401k through their job and make a spousal contribution to that traditional IRA :)

Technically you would have to marry them by December 31st. :)

oldfierm

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Re: Case Study - Anything Wrong With This Plan??
« Reply #12 on: November 17, 2014, 09:58:19 AM »
You are NOT saying that you make too much money to open the IRA, correct?  Just that you won't get the small tax deduction you get if you invest and your income is below a certain level? 

If so, you have probably already lost that much money by not having it invested as the market has risen.  It just doesn't make sense to waste so much time value of money for a tax deduction!!  And to do something that is clearly intended to circumvent the tax code to boot!  NOT WORTH IT.  Just invest like a normal person and be happy your income is high enough that you don't qualify for the deduction. 

Since every dollar you put in the 401K reduces your taxable income, you might be able to save more in taxes just investing as much as possible in the 401K. 

James

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Re: Case Study - Anything Wrong With This Plan??
« Reply #13 on: November 17, 2014, 10:04:50 AM »
I agree with others, much to complicated and not worth it.


Just invest the best way you see fit based on advice above and find others ways to make money rather than shifting money between you and your parents over the years.