Move IRA stock to Roth IRA

[ripvanwinkle]

I need some advice on "transferring" or "re-characterize" or "convert" stocks from my traditional IRA to my Roth. I've read a few things on line on this including the IRS site  but I just can't wrap my head around it.

All I want to do is to move $6,500 worth of stocks, NOT CASH, over to my Roth. Which is it - "transfer", "re-characterize" or "convert". Is there a tax penalty for this?

[CCL]

Conversion, but you should be able to transfer directly. Are both accounts at the same institution?

Recharacterization is when you convert to Roth, then move it back again, but that's not allowed anymore anyway.

[nittanycheme]

I think what you are planning on doing is considered "converting". Well, there isn't technically a penalty because you are transferring from one retirement vehicle to another.  However, you may need to pay tax on all or part of it depending on if you deducted it from your taxes when you put it into your traditional IRA and what part is earnings,which is definitely taxed.  There is a calculation you need to do to determine what part is taxable vs. not taxable.   The below is from this link, which also goes into the calculation on how to determine the taxes.  I was pondering doing this also, but I'm not sure it would be worth it to me.  I already have a decent amount in a Roth, and if I need more, I could possible go the roth 401k option at work.

What exactly is a backdoor Roth IRA?

A backdoor Roth is a conversion of Traditional IRA assets to a Roth IRA. Currently, anyone can convert money that they have put into a Traditional IRA to a Roth IRA, no matter how much income they earn. What’s more, they can also roll as much money as they want from an existing Traditional IRA into a Roth IRA. In other words, if the Traditional IRA has more than the yearly contribution limits on IRAs, you can roll over that larger sum into a Roth at one time.

Keep in mind: This isn’t a tax dodge. You will need to pay taxes on any money in your Traditional IRA that hasn’t already been taxed. The funds that you convert to a Roth IRA will most likely count as income, which could kick you into a higher tax bracket in the year you do the conversion. On the other hand, if your income happens to be unusually low in a particular year—perhaps you had a gap in employment—you could take advantage of that situation by making the Roth conversion then. Timing is important. Carefully calculate the tax implications of a Roth IRA conversion before you decide.

You can do a backdoor Roth IRA in one of two ways. The first method is to contribute money to an existing Traditional IRA, sell shares, and then roll over the money to a Roth IRA account. Or, you can convert an entire Traditional IRA account to a Roth IRA account. Your bank or brokerage should be able to help you with the mechanics. Your Traditional IRA doesn’t have to be new. You can roll over existing Traditional IRA money—or an old Traditional IRA account—into a Roth.

[CCL]

If you transfer it directly you shouldn't have any tax penalties, but will have to pay regular income taxes on the amount converted, assuming you didn't pay taxes when it was originally deposited. If you don't transfer it directly there is a timeframe for when it has to be deposited into the Roth account or there will be penalties along with the taxes. I'm thinking it's 60 days but would have to look that up to be sure.

I converted mine last year between my Fidelity IRAs. It was very simple. Their system let me choose whether I wanted to convert cash or shares. It only took a couple minutes and the shares were moved within a couple hours.

You won't be able to reverse the conversion, so be sure that's what you want. I waiting till the end of the year to be sure my conversion would not put our income over the threshold of the next higher tax bracket.

When I got my tax forms and entered the info into my tax software everything was fine, no issues or penalties for me, as I expected.

[ripvanwinkle]

Feb 5, 2019 22:22:40 GMT -5 nittanycheme said:

I think what you are planning on doing is considered "converting". Well, there isn't technically a penalty because you are transferring from one retirement vehicle to another.  However, you may need to pay tax on all or part of it depending on if you deducted it from your taxes when you put it into your traditional IRA and what part is earnings,which is definitely taxed.  There is a calculation you need to do to determine what part is taxable vs. not taxable.   The below is from this link, which also goes into the calculation on how to determine the taxes.  I was pondering doing this also, but I'm not sure it would be worth it to me.  I already have a decent amount in a Roth, and if I need more, I could possible go the roth 401k option at work.

What exactly is a backdoor Roth IRA?

A backdoor Roth is a conversion of Traditional IRA assets to a Roth IRA. Currently, anyone can convert money that they have put into a Traditional IRA to a Roth IRA, no matter how much income they earn. What’s more, they can also roll as much money as they want from an existing Traditional IRA into a Roth IRA. In other words, if the Traditional IRA has more than the yearly contribution limits on IRAs, you can roll over that larger sum into a Roth at one time.

Keep in mind: This isn’t a tax dodge. You will need to pay taxes on any money in your Traditional IRA that hasn’t already been taxed. The funds that you convert to a Roth IRA will most likely count as income, which could kick you into a higher tax bracket in the year you do the conversion. On the other hand, if your income happens to be unusually low in a particular year—perhaps you had a gap in employment—you could take advantage of that situation by making the Roth conversion then. Timing is important. Carefully calculate the tax implications of a Roth IRA conversion before you decide.

You can do a backdoor Roth IRA in one of two ways. The first method is to contribute money to an existing Traditional IRA, sell shares, and then roll over the money to a Roth IRA account. Or, you can convert an entire Traditional IRA account to a Roth IRA account. Your bank or brokerage should be able to help you with the mechanics. Your Traditional IRA doesn’t have to be new. You can roll over existing Traditional IRA money—or an old Traditional IRA account—into a Roth.

Quote - "Keep in mind: This isn’t a tax dodge. You will need to pay taxes on any money in your Traditional IRA that hasn’t already been taxed". Omg, how in heck do I know that??

[CCL]

Don't you remember if you deducted it from your income for the years you contributed? You could get out your tax returns and it should be in there.

[ripvanwinkle]

Feb 5, 2019 23:23:22 GMT -5 CCL said:

Don't you remember if you deducted it from your income for the years you contributed? You could get out your tax returns and it should be in there.

 I used the HR Block program IRA tax deduction. Money came from my bank account not payroll deduction. Contributed max each year for my age at the time.

[nittanycheme]

Usually IRA funding does come from your bank account - usually companies have 401k or 403b programs vs. IRAs.  Small companies can have SEP-IRAs.  If you deducted it from your taxes, then anything you move over will need to be taxed.  That's actually easier to figure out than if you have some that is pre-tax and some that is post tax, which is my situation and part of why I'm hesitating.  I keep looking at my current Roth balance, and thinking it is probably fine- by the time I need to start to withdraw my other funds I'll probably want them anyway, and the Roth I can just save to disperse as needed.  Or I could do a Roth 401k. With the tax changes, the reduction in MAGI from my deductible 401k isn't as attractive since I no longer can access the deductions linked to the lower MAGI.  It is just a straight federal tax tradeoff (as I live in PA, I pay state taxes on my 401k contributions either way).

[hoops902]

You want to do an in-kind Roth conversion (in-kind meaning you are not selling the investments and then moving the cash then buying into investments).  It's still a conversion because it is IRA to Roth.  Your financial institution will have to tell you whether they allow in-kind movements (or in kind transfers, same thing, the "transfer" part is just the movement of money from one account to the other...conversion vs re-characterization is defined by which type of account (IRA/Roth) you are moving to the other type...IRA to Roth is a conversion).  ACATS is the system to be used when transferring investments in-kind between brokerages (not everyone is on that system), but if you are transferring within the same brokerage they may have a method of doing the in-kind transfer without selling the investments.  

[CCL]

Feb 5, 2019 23:33:41 GMT -5 ripvanwinkle said:

Feb 5, 2019 23:23:22 GMT -5 CCL said:

Don't you remember if you deducted it from your income for the years you contributed? You could get out your tax returns and it should be in there.

 I used the HR Block program IRA tax deduction. Money came from my bank account not payroll deduction. Contributed max each year for my age at the time.

I meant if you deducted the contributions when you filed your income taxes for those years. You will still need to get the info from somewhere.