Convert Stock to Roth IRA?

Question

Hi all,
It's tax time and we are in a situation where we are considering moving $4k from an individual investment account (stock) into Roth IRA. The question is: What are the tax implications of such a transfer and if it is a prudent move?
thanks

-Sm

Answer 1

Assuming you qualify to fund a Roth IRA it will make a great deal of sense when you retire.

First of all in order to qualify for a Roth IRA, you must make less than $160,000 if you're married filing jointly (less than $110,000 if you're single).

While you cannot deduct a contribution to a Roth IRA from your income this year, the other tax breaks can be quite significant. The money you earn in the Roth is not taxed and your withdrawals at retirement are completely tax-free. Plus, you're not required to begin taking withdrawals at age 70 1/2 like a traditional IRA, so your money can continue to grow free of taxes for as long as you want.

Of course, the othr tax implication concerns the profits you may have made on the stock in your investment account. Naturally, you will have to pay capital gains taxes and possibly income taxes on the profits.

Hope that helped.

Answer 2

Whether it is prudent would depend on anticipated income at the time of your retirement, your income now and any other retirements, (employer related) you may have.

Regular IRAs are tax deferred, but not exempt, and are paid for with PRE-TAX dollars.

Roth IRAs are tax exempt, but are paid for with after tax dollars.

If your income at retirement is high enough taking dollars out of your regular IRA can put you in a higher tax bracket. This does not occur with a Roth IRA.

If you are young, (30 or under) I'd recommend that you just open a Roth IRA and begin investing primarily with it. If your income is high enough, you may not be able to put the entire amount in your regular IRA tax deferred.

This happens to me almost every year. I decided to just open a Roth and deposit my investments there. When I need an additional deduction, I will put money in my regular IRA.

Transferring your IRA to a Roth IRA, can cost you taxes and penalty. They had suspended the penalty for a while, but that period may have lapsed by now.

Good Luck

Answer 3

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