Taxable to Roth IRA

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zibarsf
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Joined: Sat Oct 02, 2021 4:28 pm

Taxable to Roth IRA

Post by zibarsf »

Hi everyone, I wanted to get your thoughts on my current situation. Some background. I recently returned to the States to work for the federal government after living abroad for a decade. Before leaving I managed to open a taxable account at Vanguard where I invested in VTSAX and my funds have now grown to $72k. Aside from a small emergency fund on a regular savings account, these are my only retirement savings. I am close to maxing out my contributions to the TSP, which I hope I get to soon (fully invested in the C fund). My goal is to retire early at some point. I’m 32 and have no debt.

My question pertains to what to do with my taxable account. I want to open a Roth IRA to take advantage of tax-free growth while using it as a secondary emergency fund or simply to have more flexibility to access my funds (contributions) if need be. To do this, I am thinking of selling stock of my taxable account (thus paying taxes on it but I suppose this is something I’d have to do eventually anyway whenever I’d want to withdraw due to early retirement/misc reason) and reinvesting it to likely the same fund in the Roth IRA. This means reinvesting $6k every year to max out my Roth contributions, for 12 years (assuming the $72k stay constant). Does this strategy makes sense? Or should I leave my taxable account to do its thing, and instead reduce my TSP contributions just to get the agency match (at 5%), max out my Roth IRA, and then contribute any surplus back to the TSP? Any feedback would be appreciated. Thanks
MrJedi
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Re: Taxable to RothIRA

Post by MrJedi »

I would shift the taxable to the Roth IRA.
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Lee_WSP
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Re: Taxable to RothIRA

Post by Lee_WSP »

It only makes sense if you would otherwise be unable to fund the Roth.
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Alto Astral
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Re: Taxable to RothIRA

Post by Alto Astral »

zibarsf wrote: Sat Oct 16, 2021 3:58 pm Or should I leave my taxable account to do its thing, and instead reduce my TSP contributions just to get the agency match (at 5%), max out my Roth IRA, and then contribute any surplus back to the TSP?
I would leave it be for now. Continue maxing out TSP. Add any excess to Roth. My reasons:
1. If you need the money at some point, you will need to sell it anyway. Might as well do it at some later point in time. You may even get a chance to tax loss harvest
2. If you need a secondary emergency fund, taxable is fine as you will likely keep Total Stock Index fund in the Roth too. If you need to protect this from market swings you likely need a bond index fund or iBonds or just high yield savings account.
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Duckie
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Re: Taxable to RothIRA

Post by Duckie »

zibarsf wrote: Sat Oct 16, 2021 3:58 pm I want to open a Roth IRA to take advantage of tax-free growth while using it as a secondary emergency fund or simply to have more flexibility to access my funds (contributions) if need be. To do this, I am thinking of selling stock of my taxable account (thus paying taxes on it but I suppose this is something I’d have to do eventually anyway whenever I’d want to withdraw due to early retirement/misc reason) and reinvesting it to likely the same fund in the Roth IRA. This means reinvesting $6k every year to max out my Roth contributions, for 12 years (assuming the $72k stay constant). Does this strategy makes sense?
It does but there are a couple of issues:
  1. It would be better to hold a different fund in the Roth IRA. That would avoid the potential for wash sales if your taxable shares have lost money.
  2. You could also sell some extra of the taxable to live on while contributing the max to your TSP which reduces your paycheck. This shrinks your taxable account quicker and gets more in your tax-sheltered accounts sooner.
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grabiner
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Re: Taxable to Roth IRA

Post by grabiner »

I would recommend selling from the taxable account, even at a capital gain, to fund the Roth IRA. The capital-gains tax will be due at some time, and it is likely to be a larger percentage of the fund value in the future, since the stock market usually goes up. Once you get the money into the Roth IRA (in the same fund if you prefer), you can avoid taxes on any future dividends or capital gains. And since this is a Roth IRA, you can withdraw your contributions tax-free and penalty-free at any time, so you don't give up emergency liquidity.

You can even hold your emergency fund in the Roth IRA, leaving it in cash or a short-term bond fund.
Wiki David Grabiner
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Re: Taxable to Roth IRA

Post by placeholder »

You have another six months to fund a roth for 2021 so I would say just start putting new money in the roth and if you don't fill it by near tax time then sell what you need then.
Topic Author
zibarsf
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Re: Taxable to Roth IRA

Post by zibarsf »

Thank you everyone for the recommendations/advice. You gave me some important points to consider.
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