07 Sep Moving your money to an IRA

Q. I have $50,000 in a stock account and $250,000 in retirement accounts. Can I use the stock account to add money to my IRA, and if I can, do I have to sell the stocks? And can I just transfer the money to my current IRAs? Or do I need a new one?
— Investing

A. It’s not as simple as transferring the stocks from one account to an IRA.

IRA contributions must be made in cash.

You can deposit a check, electronically transfer cash between accounts at different financial institutions, or authorize an internal cash transfer between accounts at the same financial institution, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

He said selling some stock in your non-retirement account is certainly an option to free up enough cash to make an IRA contribution.

Besides the cash contribution limitation, there are many other rules to follow when making contributions into an IRA, Novick said.

First, you should consider whether a contribution to a traditional IRA or a Roth IRA is more appropriate for you.

“Each type of IRA must be kept in a separate account so whether you need to open a new IRA depends on your desired IRA contribution type and what kind of IRA you already have,” he said. “Note that contributions into a SEP-IRA or Simple IRA have different rules.”

For the traditional or Roth, you can make an annual IRA contribution up to $5,500 or 100 percent of earned income, whichever is less, Novick said, and if you’re at least age 50 and have more earned income, you can also contribute an extra $1,000, called a “catch-up.”

“Earned income is employment income, including self-employment income, but only to the extent it is taxable,” he said. “It does not include rental income, interest, dividends, capital gains, disability payments, Social Security payments, pension, annuity, or deferred compensation payments, however, it does include taxable alimony.”

Non-working spouses are also eligible to make contributions based on the working spouse’s income, he said.

You can make an IRA contribution any time during the year and have up until April 15 of the following year to make your contribution, he said, noting that there are no extensions, even if you get an extension to file your income taxes.

For a traditional IRA, contributions are deductible, but only if neither you nor your spouse is a participant in a qualified company retirement plan, such as a 401(k) or profit-sharing plan.

“If you are a participant in a qualified plan, then your ability to deduct a traditional IRA contribution begins to phase out at $61,000 adjusted gross income (AGI) if you are single or $98,000 if you are married,” Novick said. “Your spouse’s ability to deduct a contribution begins to phase out at $183,000 if only you are a participant in the qualified plan.”

You cannot contribute to a traditional IRA if you are over age 70½ even if you have earned income. Distributions are generally taxable, subject to a 10 percent early withdrawal penalty prior to age 59 ½, and minimum withdrawals are required after age 70 ½, he said.

For a Roth IRA, contributions are never deductible, but distributions are generally tax-free.

Novick said neither your age nor participating in a qualified plan effects your ability to contribute to a Roth IRA, however, your ability to contribute begins to phase out at $117,000 AGI for single taxpayers and $184,000 for married taxpayers.

“Required minimum distributions don’t apply, but the earnings portion of distributions may be taxable and/or subject to a 10 percent penalty if the Roth IRA was not opened for five5 years depending on your age — there are different rules for those under 59½, those between 59½ and 70½, and those over 70½,” he said.

As you can see, there are a variety of factors involved with make an IRA contribution, so you may want to consult with a certified financial planner.

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This post was first published in September 2016.