You must make regular contributions to your Roth individual retirement account (IRA) by cash or check. Contributing securities is not allowed; the one exception is via a rollover if the same security was distributed.
You cannot fund an IRA with stocks; only via cash or check.
Advantages of a Roth IRA
A Roth IRA can be an excellent way to stash away money for your retirement years. Like its traditional IRA cousin, this type of savings account allows your investments to grow tax-free. However, it also lets you take tax-free withdrawals of your contributions at any time.
Roth IRAs also allow tax-free withdrawals of earnings on contributions after a five-year holding period under certain conditions. Those conditions include reaching age 59½, being disabled, or using the funds for first-time home-buying expenses.
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.
Ali Hashemian, MBA, CFP®
Kinetic Financial, Los Angeles, Calif.
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.
Am I Eligible to Contribute to a Roth?
The primary requirement for contributing to a Roth IRA is having earned income. Eligible income comes in two ways. First, you can work for someone else who pays you. That includes commissions, tips, bonuses, and taxable fringe benefits.
The second way to earn an eligible income is to run your own business or farm. There are also some other types of income that are treated as earned income for purposes of Roth IRA contributions. They include untaxed combat pay, military differential pay, taxed alimony, and disability benefits.
Any type of investment income from securities, rental property, or other assets counts as unearned income. So, it cannot be contributed to a Roth IRA. Other common types of income that don't count include:
- Alimony (nontaxable)
- Child support
- Social Security retirement benefits
- Unemployment benefits
- Wages earned by penal institution inmates
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 might have to be a custodial account if they're underage). On the opposite end of the spectrum, an employed person in their 70s can continue to contribute to a Roth IRA.
Unlike the traditional IRA, the fact that you participate in a qualified retirement plan has no bearing on your eligibility to make Roth IRA contributions. So, if you have the money, you can contribute to a 401(k) plan at work and then contribute to your own Roth IRA.
Eligibility to contribute to a Roth IRA also depends on your overall income. The IRS sets income limits that restrict high earners. 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 general, you can contribute the full amount if your MAGI is below a certain amount. For 2020, that’s $6,000, or $7,000 if you’re age 50 and up. If your MAGI is in the Roth IRA phase-out range, you can make a partial contribution. You can’t contribute at all if your MAGI exceeds the limits. The IRS has updated the Roth IRA contribution limits for 2020, which are the same for 2019.