Roth or Not

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LarryG
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Roth or Not

Post by LarryG »

Is there an advantage to sell a fund in a taxable account (Vanguard Total Stock Market Fund), pay capital gains tax and then purchase the same fund in a Roth IRA? The fund will be held for at least ten years.
Thank you
LarryG
livesoft
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Re: Roth or Not

Post by livesoft »

If you have no other money from someplace else to put in the Roth, then I think so. The other money could come from your emergency fund or a 0% loan (we just got 2 credit card offers in the mail this week).

It would be better to sell a fund in a taxable account and pay no taxes and put the money in a Roth IRA.

The advantage of the Roth is that any future gains will be tax-free.
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LarryG
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Re: Roth or Not

Post by LarryG »

Thank you Livesoft.
The money for the Roth would come from selling the fund in the taxable account, paying capital gain tax on that withdrawal.
The CGT would be 15%. If the fund remained in the taxable account until retirement the CGT could be 0% or 15%.
Unless I am making a wrong assumption, holding the fund in the taxable account and paying CGT of 0% after 10 years is better than withdrawing the fund to reinvest in the Roth. If the CGT is 15% on the taxable account after 10 years, there is a very slight advantage to the Roth.
LarryG
DSInvestor
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Re: Roth or Not

Post by DSInvestor »

A transfer from Taxable account to Roth IRA is a contribution and contributions are limited each year to $5500 or $6500 if age 50+. How big is the taxable holding? If large holding, the dividend distributions may be large enough to fund IRA contributions and you'd be able to avoid realizing capital gains in the taxable account. These dividend distributions are taxable whether they are reinvested or not. In the absence of another source of cash, you may be better off collecting the dividends from the taxable account and use them for the IRA contribution. There will be another distribution in March 2015 which is before the the April 15, 2015 deadline for 2014 contributions.

When selling shares in taxable account, capital gains tax applies for net capital gains. If there are capital losses or capital loss carryovers to offset realized capital gains it may be possible to reduce or eliminate capital gains and thus capital gains tax.

The 0% and 15% capital gains tax rates are for Fed taxes. Your state may treat the capital gain as ordinary income.
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Makaveli
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Re: Roth or Not

Post by Makaveli »

My parents are in a similar situation. The account isn't massive but I have advised them to realize their cap gains (10-15 individual stocks), pay the LTCG 15%, reserve cash for their upcoming trip, and reinvest remaining cash in Roth IRA. Unfortunately, they invested in taxable before every maxing their Roth.

As you and others mentioned, it likely depends on size of your account and whether you can get to 0% LTCG in retirement.
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Watty
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Re: Roth or Not

Post by Watty »

LarryG wrote:Is there an advantage to sell a fund in a taxable account (Vanguard Total Stock Market Fund), pay capital gains tax and then purchase the same fund in a Roth IRA? The fund will be held for at least ten years.
Thank you
LarryG
If you will be getting social security when you spend the money then the Roth could make less of your social security taxable since your taxable income would be lower.

http://www.bogleheads.org/wiki/Taxation ... y_benefits
rkhusky
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Re: Roth or Not

Post by rkhusky »

You also need taxable compensation in the same year as your contribution to a Roth IRA.

From http://www.irs.gov/publications/p590/ch02.html
Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments. For more information, see What Is Compensation? under Who Can Open a Traditional IRA? in chapter 1.
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LarryG
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Re: Roth or Not

Post by LarryG »

Rkhusky,
I believe that a contribution can be made if filing jointly with a sp0ouse who has earned income.
LarryG
Laura
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Re: Roth or Not

Post by Laura »

Larry,

You are correct. As long as one spouse has earned income, contributions can be made for the non-income earning spouse as well.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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