Does this tax strategy make any sense?

[cilla4progress]

I have a small sole propretorship with widely varying income from year to year. Last year I did well - for me.

I did not pay any income tax, ie, quarterly during the year, and it is now biting me in the a##! 😰

Could I shelter 7k in my IRA that is a money market, and then withdraw it during the year in case of emergency? I know I will have to pay taxes if I withdraw. I'm 67 yo.

My state has no income tax.

TIA!

[underpants]

1. I think IRA's have a 5 year rule. Gains can be taxed

If you dip into it. I could be very wrong. Here to see the DU brainiacs chime in.

[cilla4progress]

2. Good point. Thanks.

Seemed too easy...

Me too....!

Oh, you know what, I already have some other money in there. I assume I could withdraw it?

[SCantiGOP]

3. I have some very strong advice:

Don’t take tax advice on Internet forums.

You can usually get a pretty good idea by just typing your questions into a search engine. Every state and every situation is different.

[cilla4progress]

4. I see what you did there!

I did do search. Thanks.

Hive mind here has yet to let me down!

I usually pull together multiple sources when making decisions!

[PoliticAverse]

5. There's a 10% income tax penalty for early IRA withdrawals, see the IRS webpage on this...

https://irs.gov/retirement-plans/hardships-early-withdrawals-and-loans

[cilla4progress]

6. Not if you are

over 59 1/2?

[A HERETIC I AM]

7. Seems to me it would be a wash.

The answer to your question is yes, if your IRA is just a traditional and not a "Simple IRA".

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

You have to pay taxes on the money either way.

If you contribute the $7,000 to an IRA before tax day, it will reduce your AGI (as I'm sure you are aware) but if you take it as a distribution later in the year, it will count as taxable income for your 2022 taxes.

It seems to me it would just be a wash, unless your desire is to simply delay paying the taxes on seven grand.

The time constraints mentioned (Leaving assets in the account for 5 years) only apply to Roth IRA's.

[cilla4progress]

8. This is consistent with my research -

thanks!

I would only withdraw it in an emergency.

Just don't want to entirely lose access to it.

[A HERETIC I AM]

9. They can't keep you from your money.

It is after all, YOUR money.

I was going to add to my post above, that the logic (if you can find logic in the IRA codes!) is to encourage leaving money in tax deferred accounts for a long time. That is manifested in the tax advantages of such accounts.

Taking it out early is discouraged by the use of penalties. Those don't apply to you because of your age.

Also, if the entirety of this one particular IRA (you don't mention if you have more than one) is held in a Money Market fund, then it is completely liquid and you will at least know you haven't gone backward, should the market retract.

So yeah, you're good.

[cilla4progress]

10. Wow, so helpful, Heretic!

Yes, I am diversified. I have this particular MM fund just for this purpose - moving money around.

Thanks!