Can I Use Stocks Instead of Cash to Fund My Roth IRA?

The answer is usually ‘no’

Roth individual retirement account (Roth IRA) can be an excellent way to stash away money for your retirement years. Like its traditional IRA cousin, this retirement savings account allows your investments to grow tax free. However, only a Roth offers tax-free withdrawals during retirement.

Contributions to a Roth IRA are only allowed in cash. You’re generally not allowed to contribute securities, but there’s one exception: an in-kind transfer from another IRA or a 401(k).

Key Takeaways

  • You can make Roth individual retirement account (Roth IRA) contributions by cash or check, but generally not with securities.
  • Qualified distributions from a Roth IRA are tax free, and you can withdraw your contributions tax free at any time.
  • You can contribute to a Roth IRA at any age if you have enough earned income to cover the contribution.
  • Popular Roth IRA investments include stocks, bonds, mutual funds, and target-date funds.

Roth IRA Advantages

You can withdraw your Roth IRA contributions at any time—for any reason—without triggering taxes or penalties. Roth IRAs also allow tax- and penalty-free withdrawals of earnings if you’re at least age 59½ and it has been a minimum of five years since you first contributed to a Roth. Special exceptions apply for those who are younger than 59½ or don’t meet the five-year holding period. For example, you may be able to avoid the 10% penalty if you use the money for a first-time home purchase or qualified education expenses.

Roth IRAs have no required minimum distributions (RMDs) for the owner’s lifetime, making them ideal wealth transfer vehicles. If you don’t need the money, you can let it continue growing for your heirs.

Of course, like other tax-advantaged retirement plans, the Internal Revenue Service (IRS) has specific rules regarding Roth IRAs. IRS Publication 590-A provides detailed information about contribution limits, income limits, and how you can withdraw your money.

Roth IRA Contribution Rules

The primary requirement for contributing to a Roth IRA is having earned income.

There is no age threshold or limit for making Roth IRA contributions. For example, a teenager with a summer job can establish and fund a Roth (it will be a custodial account if they’re underage). Likewise, an employed person in their 70s or 80s can continue contributing to a Roth IRA.

Unlike a traditional IRA, your participation in a qualified retirement plan at work has no bearing on your eligibility to make Roth IRA contributions. So, if you have the money, you can contribute to both a 401(k) plan at work and your own Roth IRA.

Still, the IRS sets income limits that restrict higher earners from contributing to a Roth IRA. The limits are based on your modified adjusted gross income (MAGI) and tax-filing status. MAGI is calculated by taking the adjusted gross income (AGI) from your tax return and adding back deductions for things like student loan interest, self-employment taxes, and higher education expenses.

In-Kind Transfers from Another IRA or a 401(k)

In-kind transfers let you move investments from one account to another without selling the asset and paying taxes on the gains. So, for example, if you own stock in one IRA and want to move it to another IRA, you could accomplish your goal with an in-kind transfer. Similarly, you could move assets between a 401(k) and your IRA in-kind.

A potential problem with in-kind transfers could arise if you own proprietary assets at one financial institution—say, an in-house mutual fund. Those assets would not be transferable to another firm. In this situation, you would have to sell the investment instead of doing an in-kind transfer.

Of course, you want to make sure that the in-kind transfer is handled correctly to avoid any unintended tax consequences. So, reach out to both financial institutions involved to ensure that they support in-kind transfers and, if they do, learn how the process works. This will help ensure that the transfer goes as smoothly as possible—without triggering a hefty tax bill.

What is earned income?

Earned income happens in two ways:

  • You can work for someone else who pays you. That includes wages, commissions, tips, bonuses, and taxable fringe benefits.
  • Run your own business or farm.

Other types of income that the Internal Revenue Service (IRS) treats as earned income for Roth individual retirement account (Roth IRA) contributions include untaxed combat pay, military differential pay, taxed alimony, and disability benefits.

What does not count as earned income?

According to the IRS, any type of investment income from securities, rental property, or other assets counts as unearned income. Other common types of income that don’t count as earned income include:

  • Alimony (nontaxable)
  • Child support
  • Social Security retirement benefits
  • Pensions or annuities
  • Unemployment benefits
  • Wages earned by penal institution inmates

What are the Roth IRA contribution limits?

You can contribute the full amount to your Roth IRA if your modified adjusted gross income (MAGI) is below a certain amount. The contribution limit for 2021 and 2022 is $6,000, or $7,000 if you’re age 50 or older. If your MAGI is in the Roth IRA phaseout range, you can make a partial contribution. You can’t contribute at all if your MAGI exceeds the limits.

Advisor Insight

Ali Hashemian, MBA, CFP®
Kinetic Financial, Los Angeles

You must use cash or checks to fund your Roth IRA contribution for the year. The rationalization for this is the simple fact that the unrealized gains in the stocks in which you invested must be realized at some point in a non-qualified account. This is the entire reason and main advantage for funding a Roth IRA: to avoid the capital gains tax that would otherwise have to be realized at some time in the future.

For this reason, you may want to consider selling stocks that have declined in value and realize the losses, as this can serve as a tax advantage. At the same time, consider earmarking highly appreciated stocks for things such as charitable contributions or charitable remainder trusts. Doing so will help reduce your taxes.

The Bottom Line

As long as you have enough earned income to cover your Roth IRA contribution, the deposit can come from any pool of cash that you have available. However, the contribution generally must be made in cash—typically a check or transfer from your bank account to your IRA custodian.

The only way to make a non-cash contribution is via an in-kind transfer from another IRA or a 401(k). However, be very careful to follow the rules so that the IRS doesn’t consider the transfer a taxable distribution. Let your IRA or 401(k) plan administrators know what you’re trying to accomplish, so they can help to ensure that everything goes smoothly.

Article Sources
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  1. Internal Revenue Service. “Roth IRAs.”

  2. Internal Revenue Service. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”

  3. Internal Revenue Service. “Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs).”

  4. Internal Revenue Service. “IRA FAQs.”

  5. Internal Revenue Service. “Income Ranges for Determining IRA Eligibility Change for 2021.”

  6. Internal Revenue Service. “Earned Income and Earned Income Tax Credit (EITC) Tables.”

  7. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

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