I have some stocks in a taxable account. Can I use them to fund my Roth IRA instead of using cash?
You cannot directly transfer stock from a taxable account into a Roth IRA. Roth contributions are made using after tax dollars.
You would need to first sell the stock in the taxable account and then you could transfer the cash proceeds to your Roth IRA account. You could, of course, re-purchase the same stocks in the Roth IRA, but you still end up paying all taxes due on investment gains from what was sold in the taxable account.
Stephen Rischall, CRPC
1080 Financial Group
Regular IRA contributions must be made in cash. Contributions of securities are not allowed. Internal Revenue Code Section § 219(e)(1) and IRS Publication 590 provide detailed information about IRA contribution rules.
Exceptions apply to rollover contributions if the same security was distributed.
For more on this, read IRA Contributions: Eligibility And Deadlines.
This question was answered by Denise Appleby
No, you must fund a Roth IRA with cash.
However, if any of the stocks in your taxable account have unrealized losses, you could sell those stocks, realize the loss, and use the proceeds to fund your Roth. The benefit to realizing those losses is that they can offset any realized capital gains, and any excess losses can be deducted against ordinary income up to $3,000 (or $1,500 if married filing separately).
Assuming you’re qualified to make the Roth IRA, you can absolutely transfer stocks/cash from your taxable account to your Roth. When you do select the stocks, make sure to check the account value after the transfer because stocks prices fluctuate each day. If your goal is to max out the Roth contribution, you can transfer some cash to make up the difference.
For example, you transferred $5K worth of a single stock to your newly established Roth. You checked the value on the third day, and you realized the value dropped to $4,800. You can transfer $700 cash from the taxable account to your Roth to make up the difference of the $5,500 annual limit. Best!
Unfortunately, you cannot contribute securities to a Roth IRA in kind. If you don't have the cash on hand to make a Roth IRA contribution, then you would need to sell the stocks, realize any gains or losses, and make a cash contribution to the Roth IRA. Then, if you'd prefer to continue holding those same stocks, you can re-purchase them within the Roth IRA.
This situation becomes more or less attractive depending on the nature of your gains/losses (short or long term), your individual income tax rate, and your age/time horizon for investing.
Adam C. Harding, CFP