Transfer stocks Taxable acct to ROTH IRA?

[cbird01]

Does anyone know if I can transfer stocks I already own from a taxable account to my ROTH IRA? I have a small portfolio of high yield stocks that is yielding around 6.7% in cash dividends. I switched to full time student this year, so I will not have the cash for my 2006 contribution. I was thinking it would be great to have these stocks in my ROTH, so that I am not taxed on the earnings(dividends). I just am unsure of the specifics or consequences of this. Anyone?

(specifically, when I sell these stocks, would the basis be the market value at time of transfer into the ROTH and would there be a taxable basis from the time of purchase to the time of transfer?)

[kv968]

You would have to ask your broker how they would go about this. If they can do a transfer in kind or something along those lines you may not have to actually sell them. And if you did, I would imagine the basis would be the market value at the time of the transfer. Although why would you worry about that since you won't be paying taxes on gains anymore?

[creditcardfree]

A transfer in kind will not sell the shares you own. You are simply retitling your account...although they will probably give you a new account number.

You do realize this is a taxable event. You are selling the shares effectively resulting in a 1099B tax form for 2008. You will have to pay any capital gains up to the date of transfer.

The basis for your roth would be the market value of the transfer on the day the transaction occurs...just as if you had made a deposit of that amount. It is important that your contribution does not exceed $4K...or $8K if you are making a 2006 and 2007 contributions. This also assumes you have this amount in earned income for each year as well.

Good luck...call your account servicing company or representative to get more specifics.

[cbird01]

Originally Posted by creditcardfree

You do realize this is a taxable event. You are selling the shares effectively resulting in a 1099B tax form for 2008. You will have to pay any capital gains up to the date of transfer.

....This also assumes you have this amount in earned income for each year as well.

So it sounds like this is a transfer, but for tax purposes it is like a sale without actually selling the shares?

Assuming that I am taxed on any gains to the date of transfer, don't you guys think it would still be a good move. At least I will not incur taxes for the rest of the gains when I sell them in the ROTH or for the healthy dividends from the approx 6% yield. Thats a lot of cash over 25 years to retirement.

Oh, I didn't think about the income. I file joint and my wife is making all the money now...so it doesnt matter if my income is like $2,000 for this year right? My income won't kick in until Jan 2008 (god willing) and no there is no extra money for contributions, since she is saving for school after I'm done.

[disneysteve]

Originally Posted by cbird01

Oh, I didn't think about the income. I file joint and my wife is making all the money now...so it doesnt matter if my income is like $2,000 for this year right? My income won't kick in until Jan 2008 (god willing) and no there is no extra money for contributions, since she is saving for school after I'm done.

You can still fund an IRA on a spousal basis if she has the earned income to support the contributions. My wife was a SAHM for years and I still put away $4,000/yr. in her name and $4,000 in my name.

As for the transfer, there really is no such thing. All IRA contributions must be made in cash. You can no deposit securities in an IRA. So you would actually be selling the shares, depositing the money, and rebuying the shares within the Roth. In addition to the taxable aspect, there will also be commissions on the transactions.

[bjl584]

I recently transferred my Roth IRA from one firm to another. The account had to liquidated into cash before it could be transferred. You will most likely have to sell your stock and then repurchase it within your Roth.

[cbird01]

OK, now comes the poll. If I can not make contributions for 2006/2007, should I sell my high yield stock from my taxable account and put it in my ROTH to avoid future capital gains and taxes on dividends?

PS - Total portfolio value $6350 + $300 cash, with $870 in capital gains since Dec 2005 purchase.

[creditcardfree]

This thread is getting confusing. Is your current portfolio handled by a mutual fund company or a brokerage firm? Do you have a current ROTH account at the same firm?

The transfer can be done as originally said at the same firm, but if it is being done at another firm then yes you are selling and repurchasing shares. You are selling either way...thus the tax consequenses. Having worked in customer service at a mutual fund company...I know that transactions are coded so that the appropriate tax document is generated. If at the same firm, your taxable account would be coded as a sale and your roth account would be coded as a purchase....this would be the exact same buy and sale price if this was a no load mutual fund...if it was a loaded fund you would pay a sales commission and effectively have fewer shares because of the commission.

My understanding is that you have no way to make a roth contribution of any kind for 2006 or 2007 with out selling this portfolio. Correct?

Yes you will pay some taxes on those gains, but in the long run you are effectively allowing this money to grow tax free for retirement. Was there a goal that you had in mind originally with this money? Was it for a goal before retirement?

I would run the tax calculations before you do it so that you know what you will pay in tax ahead of time, but it won't be too much. It sounds like this is what you want to do.

[cbird01]

Originally Posted by creditcardfree

This thread is getting confusing. Is your current portfolio handled by a mutual fund company or a brokerage firm? Do you have a current ROTH account at the same firm?

I am not sure where you got the mutual fund company idea. It is a taxable account at Scottrade going to a ROTH IRA from the same company.

Originally Posted by creditcardfree

My understanding is that you have no way to make a roth contribution of any kind for 2006 or 2007 with out selling this portfolio. Correct?

Was there a goal that you had in mind originally with this money? Was it for a goal before retirement?

Yes, no way to make a contribution for 2006 or 2007.
Goal was for retirement.

I guess that given the circumstances, other than the hassle of the transfer and the small amount of tax + about $112 in brokerage fees for the buy/sell, in the long run it will be worth it for all of the tax savings in the long run.

[creditcardfree]

I don't think you'll have any regrets. Now just to watch that money grow will be fun!

[safari]

There is no way to convert a taxable account to a Roth IRA account. It doesn't matter if the Roth account will be with the same company. You'll have to sell your shares and pay tax on capital gains. Then you'll also have to pay transaction fees to repurchase the same shares in your Roth account. I would imagine you will keep a taxable account because you can only put up to $4,000 a year into a Roth. So you may want to keep your shares there and fund the Roth with new money.

[kv968]

Actually I was going to mention in a different thread about your holding of high-dividend yield stocks in a taxable account but I guess I'll throw my 2 cents here...Although they're great to have because of the high yield, they really shouldn't be held in a taxable account if you're planning on using those for retirement. The taxes your paying on them every year will considerably eat into your gains.

In my opinion, if you can contribute to a Roth, I would say sell your shares, pay the taxes owed, repurchase them under the under the tax shelter of the Roth and just start over from there.

[disneysteve]

Originally Posted by kv968

In my opinion, if you can contribute to a Roth, I would say sell your shares, pay the taxes owed, repurchase them under the tax shelter of the Roth and just start over from there.

I agree. If this is money that is intended for retirement, put it in a retirement account and get the tax shelter to maximize growth. It is very tax inefficient to hold high yield stocks in a taxable account.

[creditcardfree]

From this point on...we are in agreement that this is a sale of his current taxable investment. How the brokerage firm handles the transaction is up to them. I'm guessing they won't mail a check to you if you are leaving the money with them to invest in a Roth. No need to split hairs any longer.

You have made a wise decision since this is actually for retirement.