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I have a predicament:

  1. I planned to contribute the max of $5000 pretax dollars into my IRA, and

  2. I am receiving a distribution from someone else's IRA that I was the beneficiary of. I instructed this distribution to go straight to my IRA.

Can I still make my own max contribution? I plan to deduct the $5000 that I was going to contribute from my taxes next year. I figure I can still make my own contribution because a distribution from someone elses IRA can be greater than $5000 as well.

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It may depend on the type of IRA's we are talking about. – user4127 Mar 14 '12 at 19:58
I would keep your IRA and the Inherited IRA separated. They will have different rules, keeping them separate will make it clear what funds belong in which account. – mhoran_psprep Mar 14 '12 at 20:07
Have: Traditional IRA. planning to contribute this year to Traditional IRA. Getting distribution from someone elses Traditional IRA, still pre-tax dollars as is. any guidance? – CQM Mar 14 '12 at 20:44
@mhoran_psprep it appears I need to retitle it first, thanks – CQM Mar 14 '12 at 21:05
If the someone else is not your deceased spouse, what you are proposing to do or have done is illegal. If the Inherited IRA belonged to your deceased spouse, you are entitled to have it retitled in your own name and treat it as your own IRA. – Dilip Sarwate Mar 15 '12 at 0:15
up vote 1 down vote accepted

I don't know what you mean by "I instructed this distribution to go straight to my IRA." or why the IRA custodian of your inherited IRA accepted this instruction or your own IRA custodian accepted the money without any accompanying paperwork.

Distributions from an IRA cannot be rolled over into another IRA. There is an exception to this statement where the distribution is a Rollover from one of your own IRA accounts that you plan on taking in cash and rolling over into your another of your IRA accounts (with a different custodian) within the next 60 days. As a precaution, the IRS insists that the custodian making the distribution withhold 20% of the amount as Federal income tax and you have to make up the difference and send the full amount within the 60-day grace period to the new custodian. If you miss the deadline for any reason whatsoever, you are deemed to have received a distribution from your own IRA, have to pay tax on it, and possibly a penalty for early withdrawal too. The money sent in late to the new custodian is also a problem because it is likely an excess contribution to your IRA. So you can take a short-term loan from your IRA in a sense but you do have to make the US Government a loan of the 20% withholding until you get it back as a tax refund, and you have to make up the 20% withheld and send the full amount to the new custodian. So most people find it more convenient to arrange a custodian-to-custodian transfer where there is no withholding and no 60-day grace period to contend with.

That being said, if you are getting a distribution from an inherited IRA, that distribution cannot be rolled over into your own IRA. But, money is fungible, and if what happened is that you got a check from the custodian of the Inherited IRA and endorsed it to be payable to the custodian of your own IRA, then you have made a contribution to your own IRA for that year. If the amount of the check exceeded your maximum allowable contribution for the year under consideration, you have made an excess contribution and are liable for quite severe monetary penalties. Withdraw the money ASAP, and remember that you are no longer to make additional contributions for that year.

Finally, as I noted in an answer in another thread, you have to have earned income (W2 wages or self-employment income reported on Schedule C) in order to make an IRA contribution, so be sure to check that matter too.

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