sell stocks to fund individual 401K and Roth IRA?

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x806digel
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sell stocks to fund individual 401K and Roth IRA?

Post by x806digel » Thu Apr 27, 2017 5:01 pm

I am self-employed. I have an individual 401K and a Roth IRA as well as a decent amount of stocks outside of any retirement fund. (I've held these stocks for a few years.) I don't quite have enough to comfortably max out my contributions to the individual 401K and Roth IRA. Would it make sense to sell my stocks so I could use the proceeds to max out my individual 401K and Roth IRA contributions? The income tax benefit would be substantial with the individual 401K. Also this would enable me to comfortably max out my contributions for a few years.

Thanks.

mhalley
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by mhalley » Thu Apr 27, 2017 5:43 pm

You are converting long term capital gains tax rate of 15% to a your current tax rate for the 401k, and lock in the Roth tax rate at 15%. I think it makes sense.

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Tyler Aspect
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by Tyler Aspect » Thu Apr 27, 2017 5:44 pm

x806digel wrote:I am self-employed. I have an individual 401K and a Roth IRA as well as a decent amount of stocks outside of any retirement fund. (I've held these stocks for a few years.) I don't quite have enough to comfortably max out my contributions to the individual 401K and Roth IRA. Would it make sense to sell my stocks so I could use the proceeds to max out my individual 401K and Roth IRA contributions? The income tax benefit would be substantial with the individual 401K. Also this would enable me to comfortably max out my contributions for a few years.

Thanks.
Certainly you can sell stock to fund your living expenses. If that allows your earned income to fully fund your retirement contribution that can be a good thing to a certain extent; however, you don't want the size of your tax deferred account to be too lopsided compared to your taxable account. I think you will know when it gets too out of wack.
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Lou354
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by Lou354 » Thu Apr 27, 2017 5:48 pm

It probably makes sense in order to fund a Roth 401k or a Roth IRA. And probably not to fund a traditional 401k or tIRA.

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BL
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by BL » Thu Apr 27, 2017 6:06 pm

Also this would enable me to comfortably max out my contributions for a few years.
The term "comfortably" caught my eye. Maybe you can max them without cashing in??
Perhaps set things up to pay into these accounts, knowing that you have the taxable to back you up if needed. I suspect you could fairly easily get by with having an "emergency" backup, but otherwise it makes sense to me to do what you must to max those accounts.

aristotelian
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by aristotelian » Thu Apr 27, 2017 6:15 pm

Yes, go for it, as long as you keep a liquid emergency fund. Of course you could also withdraw from the Roth in the event of a true emergency.

TX_Man
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by TX_Man » Thu Apr 27, 2017 7:18 pm

The appeal of this makes sense. However it seems more like a feel good measure. The tax-advantaged nature of Roth is good, but ultimately money is being moved from one account to the other. There is no increase in savings rate. Saving up to your comfort point would be of aid because it would increase the total number of dollars in your overall investment portfolio instead of simply shuffling dollars from one pocket to another.

DSInvestor
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by DSInvestor » Thu Apr 27, 2017 7:22 pm

If any of those stocks pay dividends, stop reinvestment of dividends and use them to contribute to retirement accounts.
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x806digel
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by x806digel » Fri Apr 28, 2017 7:56 am

BL wrote:
Also this would enable me to comfortably max out my contributions for a few years.
The term "comfortably" caught my eye. Maybe you can max them without cashing in??
Perhaps set things up to pay into these accounts, knowing that you have the taxable to back you up if needed. I suspect you could fairly easily get by with having an "emergency" backup, but otherwise it makes sense to me to do what you must to max those accounts.
"Perhaps set things up to pay into these accounts, knowing that you have the taxable to back you up if needed."

Interesting. This has been my precise plan. However, I posted this because I am re-thinking this plan for a few reasons:

1. I keep a budget which clearly shows that I will have to dip into my savings quite a bit to max out my contributions in the next few years.
2. The plan works best, of course, when the market is up. My stocks have enjoyed significant gains. If those gains plummet or are erased, then the plan is less appealing. In other words, maybe I am better off selling now.
3. This year I've been hit with an A/C replacement, a large medical bill and a new (used) car.

So I could stretch myself and dip into my savings/"emergency funds" quite a bit to max out my contributions but I am feeling less comfortable with that plan.

Spirit Rider
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by Spirit Rider » Fri Apr 28, 2017 5:26 pm

I think this is a reasonable plan, but keep your eye on unintentional marginal tax increases.

There are cases where increases in AGI can cause reduction in deductions and/or credits. So while you are still only paying 15% capital gains, you marginal ordinary income tax rate can rise.

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celia
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Re: sell stocks to fund individual 401K and Roth IRA?

Post by celia » Fri Apr 28, 2017 6:44 pm

You have already paid taxes on the assets in your taxable account, except for the capital gains. (They can get a step up in value at your death and no taxes will be owed.) I would contribute to a Roth if I was eligible since the taxes have already been paid on the amount I would contribute and the growth on that contribution will be tax-free (assuming the Roth is open for at least 5 years AND I am over 59.5, when I withdraw from it).

But if you want to use taxable money to contribute to a tax-deferred account, you are, in effect, lowering your taxable income by the amount of that contribution in exchange for paying future taxes on that amount AND its growth. I wouldn't recommend it unless you are sure your tax rate will be lower in your retirement years compared to what it is now.


Here is something else you need to consider. This thread has a situation where someone has a tax-deferred account that is huge in comparison to his/her taxable account. This leads to problems in not being able to pay the taxes out of taxable when converting or withdrawing from the tIRA:
viewtopic.php?f=2&t=215374
You likely don't want to be in a similar situation. There IS such a thing as putting too much into tax-deferred accounts, IMO.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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