How to Use an Inheritance to Fund an IRA
Unless you've been living under a rock, you've probably heard about the tax advantages of the IRA. Both the traditional and Roth IRAs are intended to benefit working Americans. Thus, the Internal Revenue Service requires that IRAs be funded with earned income. Though inheritance money is not earned, you can put it in an IRA as long as the amount contributed does not exceed your earnings for the year.
Find out your maximum yearly IRA contribution. As of 2012, if you are under 50 years of age, you can put no more than $5,000 in an IRA. IRA owners who are 50 or older can contribute up to $6,000 per year. No matter how many IRA accounts you own, the sum of your yearly contributions cannot exceed the limit.
Step 2Find out your earnings for the year. You cannot contribute more than you earn, no matter how large your inheritance. So if you inherit $50,000 but earn only $1,000, you can only put $1,000 in your IRA. The IRS considers wages, salary, commissions, tips, taxable military pay and alimony as earned income.
Step 3Make your contribution by check or by electronic funds transfer. If you are funding a traditional IRA, report the contribution amount on your April 15 tax return to take advantage of the deduction. Roth IRA contributions are not tax-deductible.
References
- Internal Revenue Service: Publication 590
- Fidelity Telephone Customer Service
Tips
- You have until the April 15 tax deadline to contribute to an IRA. If you did not keep careful income records and cannot recall how much you earned, wait until you receive your W-2 and 1099 forms, which report income data, by mail in late January or February, before you contribute.
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