Taxes

Q&A: How to handle cash savings of deceased parents

March 17, 2025 By Liz Weston

Dear Liz: My mother passed away a little over a year ago, and my father about 18 months prior to her. I discovered that my parents saved up quite a lot of cash (in the six figures), and I’m afraid to deposit it without triggering the IRS. My parents routinely saved anywhere from $5,000 to up to $20,000 per year for the last 30 years. I read my mom’s handwriting on the envelopes with the dates. How can I deposit all this without triggering the IRS? Some of the bills are “vintage” so I will keep them to see if they’re worth more than face value. I also thought about using it to buy real estate.

Answer: You mention “triggering the IRS” as if your deposit might set off an explosion of audit notices and tax liens. In reality, you’re far more likely to cause yourself grief by trying to avoid IRS notice than you are by simply depositing the money.

Banks report large cash deposits — typically those of $10,000 or more — to the IRS as a way to combat money laundering. Anti-money-laundering rules also have been extended to real estate deals. Banks are looking for smaller deposits that could add up to more than $10,000, so don’t think spreading out the deposits will help you avoid scrutiny.

“Depositing the money all at once would probably arouse less suspicion with the bank than making a continuing series of deposits just under $10,000,” says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Luscombe suggests retaining all those envelopes with your mother’s handwriting. If you are questioned by your bank or the IRS, the envelopes could help show your parents were gradually saving the money over time rather than engaging in some money-raising scheme on which taxes were never paid.

You didn’t mention if your parents had wills or other estate documents, or if there are other beneficiaries. Consult with an estate planning attorney to see if the cash needs to be deposited in the name of your mother’s estate.

Jennifer Sawday, an estate planning attorney in Long Beach, Calif., recommends going in person to your bank to ask for an appointment to make a large cash deposit. Ideally, you can discuss the situation and disclose the source of the funds in a private office, where you can’t be overheard. Ask if the bank can hire an armored courier to pick you up at your home to reduce the chance you’ll be robbed en route, Sawday suggests.

Please don’t delay, since theft isn’t the only concern. Cash also can be lost to fire, floods and other disasters. (One can only imagine how many bank-averse people lost cash in the recent Los Angeles fires.) Plus, cash tends to lose value over time thanks to inflation–the vast majority of “vintage” bills are worth much less than when they were printed. You’ll want to at least start earning some interest on the money, and perhaps put it to work in other investments.

Q&A: Confusion about spending HSA money after 65

March 3, 2025 By Liz Weston

Dear Liz: I’ve read that after age 65, health savings account money can be spent on anything. Your recent column said it could be spent only on medical expenses. Which is true?

Answer: At age 65, there is no longer a penalty if you spend HSA money on something other than qualifying medical expenses. Those withdrawals will be subject to income tax, however, so you’d be losing one of your HSA’s three tax breaks (deductions on contributions, tax-deferred growth and tax-free withdrawals for qualified medical expenses).

You don’t have to have incurred the medical expenses in the same year you spend the money for the withdrawals to be tax-free, however. Savvy HSA owners keep records of any out-of-pocket medical expenses that weren’t reimbursed by insurance, flexible savings accounts or other means. As long as the unreimbursed expenses were incurred after the HSA was established, they can be used to justify tax-free withdrawals years or even decades in the future.

Q&A: When it comes to Roth IRAs, 59½ and 5 are the magic numbers

February 24, 2025 By Liz Weston

Dear Liz: You recently answered a question about Roth conversions, saying that each conversion triggered its own five-year holding period. It was my understanding that after age 59½, the five-year rule doesn’t apply and earnings aren’t taxed.

Answer: The rules for Roth IRAs can be complicated, and they’re different for accounts that you fund directly versus those that are funded through conversions.

If you contribute directly to a Roth, you can withdraw your contributions any time without tax or penalty. You can withdraw earnings tax free if you’re 59½ or older and the account has been open for at least five years.

But as mentioned in the previous column, the five-year holding period applies to each conversion you make from another retirement account into a Roth. What goes away after age 59½ is the 10% penalty for early withdrawal, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Earnings withdrawn before five years can be taxed as income. However, it’s assumed that any withdrawals are principal first, so you’d have to withdraw the entire conversion amount before earnings would be taxed.

Luscombe notes that some people set up separate accounts for each conversion to make tracking the five-year periods easier. That could be especially helpful if they plan to make substantial withdrawals that could include earnings before the last conversion amount hits its five-year mark. Once all the five-year periods have expired, the accounts can be combined into one.

Q&A: Roth conversions and holding periods

February 4, 2025 By Liz Weston

Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?

Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.

Q&A: More on those lost home improvement receipts

January 21, 2025 By Liz Weston

Dear Liz: You recently answered a question from a home seller who had lost documentation about improvements. The improvements most likely required building permits, which would have indicated the scope of improvements and, possibly, the cost as well. The local building department will have copies of those permits on file, and they can be obtained at a modest cost.

Answer: Thank you. The original letter writer had lost their documents in a house fire, a circumstance now shared by far too many in the Los Angeles area, thanks to the recent wildfires.

To recap, the value of qualifying home improvements can reduce the taxable gain when a house is sold. But if audited, sellers probably would need some kind of proof the work was done.

Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, suggested asking any contractors that were hired to provide verification of the projects and to check with the property tax assessor to see if the improvements were reflected in the home’s assessment. Photos of the home reflecting the improvements could also help in an audit, Luscombe says.