Should I move my investments to an IRA?
I am 56 years old and have $25,000 in a fully taxable brokerage account. Most of the holding's are good dividend stocks which have increased in value. However, potential capital gains are currently modest. I'd like to shift most of this wealth into my Roth and/or standard IRA. I assume this involves selling the stocks and funding my Roth with some of the proceeds. This would take several years. Is there a better way? I'm not sure how I would shift anything to my standard IRA. I'm also torn as to making this shift (for asset protection and lower future taxes) at the expense of not making new contributions to my IRA's.
If your primary goals are creditor protection and minimizing tax drag, you may have a couple of options.
You can, of course, periodically sell an appropriate proportion of your brokerage holdings, pay any capital gains taxes, and utilize proceeds to contribute to your Traditional IRA or Roth IRA up to the maximum allowable contribution. You will want to be aware of the income thresholds that stipulate the deduction limit for your Traditional IRA and contribution limit for your Roth IRA. Of course, you will also want to make sure that you fully understand the tax consequences of any asset sales.
If you are single, this method would presumably take several years to accomplish a full transition of your brokerage funds into IRAs. If enacting these transactions would take the place of contributions you are already making into your IRAs, this strategy might not make as much sense. That is, unless you decide to consume the dollars that would have otherwise been contributed to your IRAs, a proportional amount of your savings will probably still end up in taxable investment vehicles, negating the effects of the transfers.
If you are married, and your spouse is not already contributing to an IRA up to the contribution limit, you may be able to contribute to an IRA on behalf of your spouse, even if your spouse does not earn any income. On a household basis, this would potentially allow you to transition your brokerage account funds into an IRA while continuing to make your regularly scheduled IRA contributions.
If you have a retirement plan at work (like a 401k, for example), that you aren’t already maxing out – and because money is fungible – you could begin to contribute more to your retirement plan, and utilize the proceeds from the brokerage account to replace the income withheld from your paycheck to fund the retirement plan, if necessary. Depending on the type of plan, and the taxable position of the brokerage holdings, this could potentially result in a net tax wash, or better. It might also allow you to more rapidly accomplish your goal of transitioning assets in the amount of those held in brokerage to a creditor protected account with less tax drag (The zip code on your question is from CT. CT provides creditor protection to 401k assets, as they do for IRA assets.).
If you are self-employed, you could also establish your own retirement plan and potentially accomplish the same strategy as the one just described.
Really, you have some other options, too; but they, like these, will be highly dependent upon your personal circumstances. So, you might have a few different options to accomplish the goal you have described, but the best path is going to depend on several personal factors.
One other option is to make maximum contribution to a 401K or other any other retirement plan you may have at work or as a business owner and then use the proceeds from the sale of the stocks for your living expenses.
For 401K /403b plans you can also contribute after tax amounts in excess of the 18,000+ 6000 catch up pre tax amounts, as long as the total contributions by you and your employer is less than 60,000. When you retire or change jobs you can transfer the after tax contributions to a Roth IRA and the pre tax amounts and any earnings to a traditional IRA.
I believe shifting into a Roth IRA might be a good idea. It would help you save future taxes on capital gains and dividends. To do so you will need:
1) to have earned income. You can put away a max of $6500 into IRAs (if you have a spouse, you can contribute for her as well.
2) to pay taxes. You will need to liquidate your investments now, pay taxes on the gains before you contribute into the Roth.
If your strategy still makes sense and fits towards your long-term plan, go for it.
I hope this helps.
Without knowing your full picture and cannot begin to give you sound advice. You said you already have an IRA? How much is in it already? How much assets do you have other than the $25k and in what type of accounts? You have to do your planning as a complete comprehensive plan, not piecemeal, otherwise you might inadvertently shoot yourself in the foot.
For instance, are you still working and are you self-employed? If so, there may be a much better way to get money into retirement accounts - Roth or otherwise.
To answer your contribution question though, yes, you can only contribute cash into an IRA, not "in-kind" contributions. At 56 years old with catch-up provisions, you could put in $6,500/yr into your Roth or regular IRA assuming you have that much in earned income. So yes, it would take 4 years. Is it a good idea, I haven't a clue without knowing all of your details.
Hope this helps (somewhat) and best of luck, Dan Stewart CFA®
It appears that one of your concerns is tax liability on the gains in your brokerage account. If I understand correctly, the holdings are in dividend stocks that have substantial capital gains. Your comment that "potential capital gains are currently limited" is probably on target since the high dividend stocks as a group had a good run but most have flattened out over the last eight months.
If all or most of the gains are long term, it might be worthwhile for you to consider selling enough to make a $6500 contribution to a Roth IRA later this year and again early in 2018. (A Traditional IRA is funded by funds diverted from pretax income.) You may want to sell those with the smallest gains to reduce the tax bite. Since the annual IRA contribution limit is $6500 for people over 50, you are correct in thinking that this might take several years. Even so, in place of the IRA contributions, which will be limited, there are other options. One is to open a low-cost variable annuity, such as the Monument Advisor from Jefferson National. With such an investments, no taxes would be due until you withdraw funds, so similar to a Traditional IRA, the investments would grow over time without an annual tax liability. The cost of this annuity is only $20 a month and there are about 350 different investment choices. You could, of course, just add to your brokerage account, but that would not provide a similar tax benefit.