Rolling Taxable Account into Roth

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Waldcayut
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Joined: Fri Feb 22, 2019 7:13 pm

Rolling Taxable Account into Roth

Post by Waldcayut »

So I have a taxable account of around 22,000 in one single stock (yes, it’s unwise and odd). I’ve had shares in this company since I was a child because my grandparents bought it for me when I was very young, sometime back in the early 90’s, I have no clue what the cost basis was. I moved the shares from the original broker to Fidelity when I started taking better control of my finances a few years ago just so it was easier to keep an eye on it.

I am honestly a little unsure about how this would work but I feel like the best thing to do is just roll it into a Roth IRA. I am not positive how this would work or how to do so though. I am assuming I would get hit with two rounds of taxes, first capital gains from selling off the shares, and then tax prior to putting it in a Roth. Also, if my understanding is correct this would have to be done over a period of years since 6500 is max contribution.

For a bit of context, I am 29 years old and recently graduated from medical school with around 85k in debt and am about to start residency in July. I will make around 58k in my first year, going up about 2k per year for four years total. After that, starting salaries for my specialty are around 400k-500k. If anyone has any advice or guidance on something better to do or if I am missing something please let me know!
HomeStretch
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Re: Rolling Taxable Account into Roth

Post by HomeStretch »

Congratulations on graduating from medical school!

You can’t rollover your $22k Taxable account to a Roth IRA. However, you can use the $22k in sale proceeds to make allowed Roth contributions during your lower-income residency years to a 401k/IRA. Invest in low-cost diversified funds/ETFs.

You can try contacting the original brokerage for the cost basis information. Or estimating the cost based on when you think it was purchased. It may not matter as I think your taxable income may be low enough that your capital gain rate is 0%.

What is the interest rate and repayment plan for your $85k in student loans?
Last edited by HomeStretch on Sat Jun 10, 2023 1:42 pm, edited 1 time in total.
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FiveK
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Re: Rolling Taxable Account into Roth

Post by FiveK »

Great idea if you could do it, but the law doesn't allow you simply to roll over a taxable account to a Roth account. Annual contributions are limited - see IRA Contribution Limits.

401k/403b/etc. annual contributions also have limits.

There are no limits on conversions from traditional accounts to Roth, other than your willingness to pay the tax on those conversions.

On the brighter side, congratulations for thinking about this at your age! Yes, given your likely income profile, putting as much into Roth accounts as you can over the next four years will likely be best, so direct contributions that way, and you might also do some Roth conversions if you have money in traditional accounts now. Good luck!
the_wiki
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Re: Rolling Taxable Account into Roth

Post by the_wiki »

Just to clarify the above:

You can contribute $6500 a year to Roth IRA. So you can sell enough of your stock to have $6500 after taxes and then contribute that to your Roth.



When you read about Roth conversions that is with people converting a Traditional IRA (or some 401k plans) to a Roth IRA. Since your holdings are not in an IRA now, they cannot be directly converted.



Just out of curiosity, what is the single stock?
HeelaMonster
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Re: Rolling Taxable Account into Roth

Post by HeelaMonster »

Welcome to forum, and congrats on completing med school!

You can't really "roll" it into a Roth (and using that terminology may eventually cause confusion with a true "rollover" from employer based retirement plan into a Rollover IRA). You can, however... as you appear to know... make annual contributions to either a Roth or Traditional IRA. There are income limits on this, which you will exceed once you finish residency and earn full salary. But for now, you can contribute up to $6500 per year (this cap goes up every few years), as long as you have EARNED income to cover that amount... which you will, in residency.

You will not be taxed twice, because you would be contributing already-taxed money to the Roth IRA. Think of that as coming out of your pocket or your bank account, and whether it got there from your paycheck or from selling off old stock, doesn't really matter. It has already been taxed, and once was enough! OTOH, contributions to a Traditional IRA get you a tax deduction, which the govt will eventually recapture, but only after many years of tax-deferred growth. Along the way, you would have options to "CONVERT" (also not a rollover) from Traditional to Roth, paying tax at that point. In either case, whether by direct contribution or conversion from Traditional IRA, it will never be taxed again once it is inside Roth IRA (assuming you don't take it out too early). See link:

https://www.bogleheads.org/wiki/Traditional_versus_Roth

[ETA: And now I see others have covered some of the same points while I was slowly typing, but will let this stand and you can get it from all angles!]
Last edited by HeelaMonster on Sat Jun 10, 2023 2:55 pm, edited 1 time in total.
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jeffyscott
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Re: Rolling Taxable Account into Roth

Post by jeffyscott »

Waldcayut wrote: Sat Jun 10, 2023 1:22 pm I am assuming I would get hit with two rounds of taxes, first capital gains from selling off the shares, and then tax prior to putting it in a Roth.
Just the capital gains tax from selling shares. There's no extra tax for making a Roth contribution.

If you can do so in the 0% cap gains bracket, it may make sense to sell all the shares during your lower income years, whether or not all the money can go to Roth. You can get rid of the stock, pay no tax on the gains, then reinvest in Roth, reinvest in taxable,
use it to pay part of the loan, and/or spend it.
Topic Author
Waldcayut
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Joined: Fri Feb 22, 2019 7:13 pm

Re: Rolling Taxable Account into Roth

Post by Waldcayut »

Thanks for the good info so far guys. I apologize for the confusing language, I know that you cannot directly transfer taxable into a Roth/Traditional. So my plan would be to sell the stock in chunks yearly so as to max out a Roth until the taxable account is drained. But I am seeing now that it may be beneficial to sell now if I am within the 0% capital gains limit.
HomeStretch wrote: Sat Jun 10, 2023 1:36 pm Congratulations on graduating from medical school!

You can’t rollover your $22k Taxable account to a Roth IRA. However, you can use the $22k in sale proceeds to make allowed Roth contributions during your lower-income residency years to a 401k/IRA. Invest in low-cost diversified funds/ETFs.

You can try contacting the original brokerage for the cost basis information. Or estimating the cost based on when you think it was purchased. It may not matter as I think your taxable income may be low enough that your capital gain rate is 0%.

What is the interest rate and repayment plan for your $85k in student loans?
The interest is 5.28%. My plan is to enter the REPAYE plan in residency. Making ONLY minimum payments and assuming a 400k salary out of residency when I graduate in 2027, I’d be done by around 2029. However once I am making my full salary I’ll throw more on it than minimum and be done faster. I am fortunate in that I have less than half the debt burden of most of my classmates so I’d like to not carry it around forever.


the_wiki wrote: Sat Jun 10, 2023 1:42 pm Just to clarify the above:

You can contribute $6500 a year to Roth IRA. So you can sell enough of your stock to have $6500 after taxes and then contribute that to your Roth.



When you read about Roth conversions that is with people converting a Traditional IRA (or some 401k plans) to a Roth IRA. Since your holdings are not in an IRA now, they cannot be directly converted.



Just out of curiosity, what is the single stock?
Yes thank you that’s what I’d meant. I figured it would be best to just sell it off in chunks to max out the Roth each year until the 22k is drained rather than sell it all off now and keep it in savings to invest. And I appreciate the curiosity, it’s McDonald’s haha no clue why.
HeelaMonster
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Re: Rolling Taxable Account into Roth

Post by HeelaMonster »

Waldcayut wrote: Sat Jun 10, 2023 2:13 pm Thanks for the good info so far guys. I apologize for the confusing language, I know that you cannot directly transfer taxable into a Roth/Traditional. So my plan would be to sell the stock in chunks yearly so as to max out a Roth until the taxable account is drained. But I am seeing now that it may be beneficial to sell now if I am within the 0% capital gains limit.
Sounds like you've got everything straight, in terms of options and mechanisms. If it were me, accepting that we know nothing about the rest of your circumstances, here's what I'd do....

Sell off Mickey Dee in one chunk. You should have little to no tax hit (even less likely THIS year, with half-year salary). Put that into an index fund that you might want for the long haul. Then each year get in the habit of funding your IRA from incoming salary money (you may be mentally picturing your stock as funding the IRA contribution, but there is nothing that says it has to be with those actual dollars... "money is fungible," as they say). If you need all of your salary for living expenses, you can still tap your taxable brokerage account or other savings.

For the next few years, you should be able to fund Roth directly (i.e., through the "front door"). Once your salary bumps you over income limits, you can switch to funding Traditional IRA with non-deductible contribution and immediately converting to Roth (this is the so-called "backdoor conversion"). And by that time, you will have other options to contribute even more to retirement plans. But annual contributions are a great habit to form, right out of the gate (...he says, as the father of late-twentysomethings). :wink:
BarbK
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Re: Rolling Taxable Account into Roth

Post by BarbK »

Waldcayut wrote: Sat Jun 10, 2023 2:13 pm ........ it’s McDonald’s haha no clue why.
I found this very sweet. I wouldn't be surprised if your grandparents took you to McDonalds when you were young and bought you shares to teach you about 'owning' a company.
MrJedi
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Re: Rolling Taxable Account into Roth

Post by MrJedi »

Do you ever make charitable cash gifts? If so, instead of cash gifts, you can gift the shares or put them into a DAF to avoid paying capital gains taxes. The charity and/or DAF gets the full value and does not pay capital gains taxes when you do it this way.
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