18 Nov Trying to finagle a tax-free transfer

Q. I have $200,000 in a brokerage account in stocks, but I’m thinking of using the money to start Roths for me and my wife. Is there a downside, and can we do this without selling the stocks?
— Finagling

A. We’re glad to see you’re looking for tax-free savings option, but it’s not as simple as making the move.

The first thing to consider whether you are even eligible to make Roth IRA contributions.

In order to make full annual Roth IRA contributions of $5,500, or $6,500 for those over 50, a couple’s modified adjusted gross income (MAGI) must be below $184,000 (2016) and $186,000 (2017), said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

“The couple will also need to have `earned income’ equal to or greater than the amount of the Roth IRA contribution they would like to make,” Maye said. “However, if only one of them works there is the opportunity to still contribute due to spousal IRA rules.”

So, Maye said, best case? Assuming you and your wife are both over 50 and meet the earned income test, the most you could contribute would be $6,500 each or $13,000 in total (2016/2017).

Now to your specific question can they make “in-kind” contribution of stock held in the brokerage account into a Roth IRA.

The simple answer is no, Maye said.

“The couple can’t contribute to a Roth IRA by making an `in-kind’ transfer of stocks because the IRS only allows cash for IRA contributions,” Maye said. “So if they wanted to use the money from the brokerage account, they would need to liquidate stock positions to raise the cash.”

This would create a capital gain or loss and the tax treatment would depend on your holding period, he said.

You can transfer in-kind assets from other retirement accounts, such as another Roth account, a traditional IRA or a 401(k) plan into a Roth IRA.

But even if you had a traditional IRA, while the underlying assets could be transferred into a Roth IRA “in kind,” a tax bill would still be due on any “pre-tax” assets being moved over into Roth IRA, Maye said.

“Assuming the couple does qualify to open the Roth IRA it still might make sense if the stock they are selling has capital losses or they are long term capital gains,” he said. “The potential benefit of having Roth IRA is future growth is `tax free’ assuming the five-year Roth IRA withdrawal rules are met.

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This post was first published in November 2016.