Transfer of Equities from TIRA to a Roth. 3 Questions:

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cobra911
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Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by cobra911 »

1) Can Stocks be transferred "In Kind" from a TIRA to a Roth?
2) Are taxes due at "Current Value" when transferred?
3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer.

I assume Yes is the answer to all 3 questions, but thought I would ask BH for confirmation.
Thanks for the Help! :thumbsup
jebmke
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by jebmke »

Cost basis is irrelevant in IRAs.

I'm not sure whether assets can be transferred in-kind. If they can, it would be treated as a Roth conversion and you'd owe tax on the conversion -- that is, the conversion would be taxable income; of course, the tax could be zero if your income is low enough. Much simpler to just liquidate, convert and re-buy on the other side.

Pay the tax from a taxable account and take advantage of the opportunity to increase your tax advantaged account balance.
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ResearchMed
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by ResearchMed »

jebmke wrote: Tue Jul 05, 2022 3:31 pm Cost basis is irrelevant in IRAs.

I'm not sure whether assets can be transferred in-kind. If they can, it would be treated as a Roth conversion and you'd owe tax on the conversion -- that is, the conversion would be taxable income; of course, the tax could be zero if your income is low enough. Much simpler to just liquidate, convert and re-buy on the other side.

Pay the tax from a taxable account and take advantage of the opportunity to increase your tax advantaged account balance.

Perhaps it depends upon brokerage firm, but when we've converted "in kind" it was much easier than if we'd had to liquidate, convert, and then repurchase. (And that could end up with some "time out of market", if that's a concern.)

It was X shares of A in the TIRA, and then X shares of A in the Roth IRA. Simple.

We paid the tax separately, so the full amount of the holdings were converted.

RM
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Statistical
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by Statistical »

Yes it can be done in kind. The process varies by custodian. Regardless of if it is in-kind or sold for cash and the cash converted the conversion amount (and thus taxes) is on the dollar value of the conversion. If you convert 10 shares of VTI @ $200 the custodian will report $2,000 conversion no different than selling the 10 shares and converting $2,000 in cash.

Basis isn't the same thing in tax sheltered accounts and in many case it doesn't matter (is zero). Only non-deductible contributions in a traditional IRA have a cost basis. This is uncommon outside of backdoor Roth (contribute non-deductible and immediately convert to Roth). The basis is not the purchase price of the assets but the non contribution amount. If your trad-IRA is all pre-tax then its basis is always $0. If you have a $105,000 trad IRA (all pre-tax) and make a $5k non-deductible contribution it has a $5k basis. Any non zero basis is used to reduce the tax of the conversion (you are only taxed on the pre-tax part). There is no basis for Roth accounts at all because it is all tax free.
Last edited by Statistical on Tue Jul 05, 2022 4:20 pm, edited 1 time in total.
jebmke
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by jebmke »

ResearchMed wrote: Tue Jul 05, 2022 3:40 pm
jebmke wrote: Tue Jul 05, 2022 3:31 pm Cost basis is irrelevant in IRAs.

I'm not sure whether assets can be transferred in-kind. If they can, it would be treated as a Roth conversion and you'd owe tax on the conversion -- that is, the conversion would be taxable income; of course, the tax could be zero if your income is low enough. Much simpler to just liquidate, convert and re-buy on the other side.

Pay the tax from a taxable account and take advantage of the opportunity to increase your tax advantaged account balance.

Perhaps it depends upon brokerage firm, but when we've converted "in kind" it was much easier than if we'd had to liquidate, convert, and then repurchase. (And that could end up with some "time out of market", if that's a concern.)

It was X shares of A in the TIRA, and then X shares of A in the Roth IRA. Simple.

We paid the tax separately, so the full amount of the holdings were converted.

RM
Could be. When I have done conversions at VG this liquidation/re-buy happened all at once with an online transaction. Has been a few years since I did one so it may be harder now.
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jebmke
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by jebmke »

Statistical wrote: Tue Jul 05, 2022 3:49 pm Yes it can be done in kind. The process varies by custodian. Regardless of if it is in-kind or sold for cash and the cash converted the conversion amount (and thus taxes) is on the dollar value of the conversion. If you convert 10 shares of VTI @ $200 the custodian will report $2,000 conversion no different than selling the 10 shares and converting $2,000 in cash.

Cost basis doesn't matter. First only non-deductible contributions in a traditional IRA have a cost basis. It is the basis of the contribution not the purchase. If your trad-IRA is all pre-tax then its basis is always $0. Second any non zero basis is used to reduce the tax of the conversion. There is no basis for Roth because it is all tax free.
And just to be clear, the basis for an IRA is the basis of the total of all IRAs and is not the basis of any specific asset. In addition, the custodian doesn’t keep track of the IRA basis. That is done by the taxpayer.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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celia
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by celia »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm 1) Can Stocks be transferred "In Kind" from a TIRA to a Roth? YES

2) Are taxes due at "Current Value" when transferred? YES

3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer. Cost Basis is not needed since there are no capital gains/losses in tIRA or Roth. Every dollar withdrawn from a TIRA is taxed, not the gains. Every dollar withdrawn from Roth is subject to the 5-year and age 59.5 rule, except for contributions and converted amounts.

If you are doing "Backdoor Roths", the "basis" has nothing to do with the "cost basis", if that's what you are thinking about.
02nz
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by 02nz »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm 1) Can Stocks be transferred "In Kind" from a TIRA to a Roth?
I'm pretty sure every major brokerage allows Roth conversions (which is what you'd be doing) in-kind. I just did this with E*Trade, it's an online thing where I tell them I want to transfer X shares of Y fund, and the next business day it was done. With some brokerages you have to call in, with others it's a form that has to be manually processed.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by 123 »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm ...3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer...
Though cost basis of securities is irrelevant in an IRA account for tax purposes some investors may like to keep track of the basis for their own monitoring purposes. Some brokers allow you to easily adjust the cost basis shown for securities in an account.
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cobra911
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by cobra911 »

Thanks much for the great responses! My 3rd question was a mental lapse on my part... I knew Roths were tax free and Cost Basis is irrelevant. :oops:
The reason for my question is: I'm retired and am 5 years from RMD's. I have a sizeable TIRA that has declined 20%+ since the market started it's fall. If this continues (as some predict), I'm considering converting shares In Kind to my Roth... thinking this would reduce my tax hit while the shares are depressed and I remain invested in the same holdings (I like my current portfolio) on a tax free basis. I would move the maximum amount so as not to change my tax bracket. Does this make sense?
Thanks
Statistical
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by Statistical »

cobra911 wrote: Wed Jul 06, 2022 10:54 am Thanks much for the great responses! My 3rd question was a mental lapse on my part... I knew Roths were tax free and Cost Basis is irrelevant. :oops:
The reason for my question is: I'm retired and am 5 years from RMD's. I have a sizeable TIRA that has declined 20%+ since the market started it's fall. If this continues (as some predict), I'm considering converting shares In Kind to my Roth... thinking this would reduce my tax hit while the shares are depressed and I remain invested in the same holdings (I like my current portfolio) on a tax free basis. I would move the maximum amount so as not to change my tax bracket. Does this make sense?
Thanks
Conversion now may make sense. Also converting over the next couple years even if the market goes up PRIOR to RMDs to spread out the converted amount over longer period of time which means less per year which hopefully means lower tax brackets is all around a good idea.

In-kind however won't save you 1 extra cent in takes. That is taxed is the converted amount. Period.

Convert 10 shares of VTI 2 $200 per share = $2,000 converted in shares. You are taxed on $2,000 as if it is income.
Sell 10 shares of VTI for $2,000. Convert the $2,000 in cash. You are taxed on $2,000 as if it is income.

Depending on your income tax brackets in retirement and the size of your tIRA and your future tax expectations it can make sense to convert enough that you "use up" the current tax bracket.

As a very simplified example say you are MFJ, take standard deduction, and have $80k worth of taxable income (to include capital gains). That puts you in the 12% bracket and you have $29k more space in that bracket before you start getting taxed at 22%. Now lets say you look forward and when you start taking RMD it will push you over that $109k mark and into the 22% bracket. In this case it would make sense to convert $29k a year every year prior to RMDs to bring your tIRA balance and pay no more than 12% in taxes on it. That reduces the amount you will need to convert and keeps more of your wealth out of the 22% bracket. In essence by converting early you are maxing out the maximum possible paid at 12% to reduce future taxes as 22%+.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by RetiredCSProf »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm 1) Can Stocks be transferred "In Kind" from a TIRA to a Roth?
2) Are taxes due at "Current Value" when transferred?
3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer.

I assume Yes is the answer to all 3 questions, but thought I would ask BH for confirmation.
Thanks for the Help! :thumbsup
The answers may vary depending on the brokerage or fund family:

1) At Fidelity, I have a brokerage account where I convert "in kind" from a tIRA. At TRowe, I have a mutual fund account (not brokerage account), where I can convert "in kind" with an online Roth conversion, but have the option of exchanging funds over the phone on a Roth conversion.

2) At Fidelity, I cannot withhold taxes on a Roth conversion. At TRowe, I can choose to have taxes withheld on a Roth conversion. I generally withhold taxes from other income sources to cover the taxes (enough to meet safe harbor) on the Roth conversion. Alternatives are to make quarterly estimated tax payments or to split the tax return into four quarters (more paperwork). I have a small basis on my tIRA, which TurboTax calculates for me.

3) At Fidelity, the "cost basis" that appears on my portfolio reflects my investment in the fund -- no adjustments are made for reinvestment of dividends, cap gains, or Roth conversion. OTOH, TRowe resets my "cost basis" when I take a Roth conversion, as if I had sold the fund in the tIRA and re-purchased it in Roth.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by retired@50 »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm 1) Can Stocks be transferred "In Kind" from a TIRA to a Roth?
2) Are taxes due at "Current Value" when transferred?
3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer.

I assume Yes is the answer to all 3 questions, but thought I would ask BH for confirmation.
Thanks for the Help! :thumbsup
In my experience, at Vanguard, the answers are...
1. Yes
2. Yes
3. No

I also realize that cost basis is irrelevant, but Vanguard publishes average cost for the mutual funds in my Rollover and Roth IRA, and after doing a partial conversion from Rollover IRA to Roth IRA, the basis is the same. I thought that preserving the cost basis was part of transferring shares in-kind.

Regards,
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by Alan S. »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm
3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer.
Individual holdings in an IRA do not have a cost basis, however the Roth IRA itself does have a cost basis. When you convert, whether the conversion is taxable or non taxable, the conversion basis for your Roth IRA is increased by the gross amount of the conversion.

If you subsequently take a non qualified Roth IRA distribution, your conversion basis goes on line 24 of Form 8606. But it is interesting to note that ONLY Form 8606 actually refers to this figure as basis.

The tax code refers to these amounts as simply "contributions". For Roth 401k plans, these amounts are "investment in the contract". Thus, IRS terminology is inconsistent and somewhat confusing.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by crefwatch »

+1 for Statistical's answer. It's amazing how persistent is this myth that there is an advantage to in-kind Roth conversions over cash conversions of the same amount.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by BabaWawa »

crefwatch wrote: Thu Jul 07, 2022 6:30 am +1 for Statistical's answer. It's amazing how persistent is this myth that there is an advantage to in-kind Roth conversions over cash conversions of the same amount.
I don't believe its a myth. By converting in-kind, you won't be paying a small cost relative to the buy/sell spreads on both ends of the transactions to sell and repurchase ETFs during conversion. If you are happy with your allocation and choice of funds, always better to transfer in-kind. Also means no time out of the market during the conversion process. And since markets go up more than they go down, time out of the market is also a cost to you.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by crefwatch »

BabaWawa, thanks for your reply. I would counter that there is a delusion that individual investors need to follow policies embraced by institutions and professional investors, in order to be successful. I personally believe that having funds in the correct tax basket (whatever that means for one person) is much more important than whether you are out of the market for a day or a week. (I say that simply because the current case is about Roth conversions.)

Once you have five or six figures in your TIRA, you might always have some cash, either from dividends or "dry powder". I personally accumulate cash in advance of (currently) annual Roth conversion. A less clear example is that I sometimes pay TIAA a $35 fee to buy a Vanguard Admiral mutual fund, because if you WANT the fund, and you never invest less than $25,000, the $35 is trivial. (And the ER is less than many TIAA products.) It's not always revealed, but there are a lot of agonized decisions made here about $3,500 transactions.

I suppose it is true that a sensible, disciplined investor should never have any cash on hand in a tax-advantaged account. But statistics show that individual investors usually buy and sell at sub-optimal times, often for non-rational reasons. This is not the current topic, but as a retiree, I keep two years of expenses in cash in our taxable accounts, which has proven to be a valuable cushion against market declines and forced sales.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by RetiredCSProf »

Getting back to the subject of Roth conversions ...

My TRowe mutual fund account allows me to convert either in shares or in dollar amounts. When converting in dollars, there is sometimes an extra penny somewhere due to round-off on the share price.

At Fido, I can convert only in shares, not in dollar amounts. If I want to convert an exact dollar amount for the calendar year at Fido, I convert in shares first, and then "round off" with a conversion of $ in MM accounts; e.g., suppose I want to convert $10K and take most of this from Fund A. Then I would convert enough shares of Fund A to equal about $9000 - $9500 in Fund A, and (next market day) convert the difference in MM shares. This requires keeping some cash in tIRA.
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Re: Transfer of Equities from TIRA to a Roth. 3 Questions:

Post by Sandi_k »

cobra911 wrote: Tue Jul 05, 2022 3:21 pm 1) Can Stocks be transferred "In Kind" from a TIRA to a Roth?
2) Are taxes due at "Current Value" when transferred?
3) Is the Cost Basis of said equities (now in a Roth) reset to the Current Value on the date of transfer.

I assume Yes is the answer to all 3 questions, but thought I would ask BH for confirmation.
Thanks for the Help! :thumbsup
1) Yes. Just did so at Fidelity today, using the Trade function.

2) Yes and No. They ask if you want estimated taxes withheld when you do the conversion. I said NO, as I am over-withholding from my paycheck to cover the taxes due. I then had to click an acknowledgement that taxes might be due in 2023 when we file our 2022 tax return.

3) NO - cost basis is irrelevant for the IRA transfer. What matters is the value of what you are converting from pre-tax to post-tax accounts. Since you can only transfer shares, I selected which shares to transfer, and requested a number of shares that got me close to the dollar amount I wanted to move.
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