Keep funds in a taxable account vs transfer to Roth IRA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

Hi all - My wife and I have around $100k in an index stock fund (VTSAX) in a taxable joint account at Vanguard along with Roth IRA's for each of us.
Is there any advantage to moving a portion of that joint account every year (per annual Roth maximum contributions) to our IRA's or should we just leave it where it is?
sailaway
Posts: 8636
Joined: Fri May 12, 2017 1:11 pm

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by sailaway »

If you cannot otherwise fund your Roth IRA's from income, but you are otherwise eligible, then drawing down taxable is entirely reasonable. We risk doing this each year to fully fund the mega Backdoor Roth because if we don't have that deducted from the paycheck, the space is gone. If I have extra, I can always add to taxable.
RyeBourbon
Posts: 1452
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by RyeBourbon »

How much and where are you investing from your employment income?
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

RyeBourbon wrote: Tue Jun 04, 2024 4:52 pm How much and where are you investing from your employment income?
I'm currently working and funding around $20,000/year into a 401k and anticipate doing this for at least 10 more years. I'm investing in a 60/40 AA into Vanguard index stock fund and vbilx for bonds
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

sailaway wrote: Tue Jun 04, 2024 4:52 pm If you cannot otherwise fund your Roth IRA's from income, but you are otherwise eligible, then drawing down taxable is entirely reasonable. We risk doing this each year to fully fund the mega Backdoor Roth because if we don't have that deducted from the paycheck, the space is gone. If I have extra, I can always add to taxable.
Thx - at retirement (which is at least 10 years down the road for me) if I take "x" amount a year from that joint account is that considered taxable or considered like savings?

I've been in accumulation phase and am pretty green when it comes to retirement particulars
sailaway
Posts: 8636
Joined: Fri May 12, 2017 1:11 pm

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by sailaway »

Scoot86 wrote: Tue Jun 04, 2024 5:18 pm
sailaway wrote: Tue Jun 04, 2024 4:52 pm If you cannot otherwise fund your Roth IRA's from income, but you are otherwise eligible, then drawing down taxable is entirely reasonable. We risk doing this each year to fully fund the mega Backdoor Roth because if we don't have that deducted from the paycheck, the space is gone. If I have extra, I can always add to taxable.
Thx - at retirement (which is at least 10 years down the road for me) if I take "x" amount a year from that joint account is that considered taxable or considered like savings?

I've been in accumulation phase and am pretty green when it comes to retirement particulars
Whenever you invest in equities, when you sell the original price you paid is not taxed. The gain since the original purchase is usually taxed at LTCG rates. Exactly how this is determined will depend on the tracking method you have selected in your account. SPEC ID gives you the most control.
RyeBourbon
Posts: 1452
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by RyeBourbon »

Scoot86 wrote: Tue Jun 04, 2024 5:14 pm
RyeBourbon wrote: Tue Jun 04, 2024 4:52 pm How much and where are you investing from your employment income?
I'm currently working and funding around $20,000/year into a 401k and anticipate doing this for at least 10 more years. I'm investing in a 60/40 AA into Vanguard index stock fund and vbilx for bonds
If you're not contributing to Roth, you should consider (based on the tax owed), selling VTSAX in taxable, contributing and buying VTSAX. You have the same asset allocation, but now all growth is tax free.

I assume your 401k contributions are pre-tax and you've determined that your current tax rate will likely be higher than your retirement rate?
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
User avatar
FiveK
Posts: 16228
Joined: Sun Mar 16, 2014 2:43 pm

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by FiveK »

How do the suggestions in Prioritizing investments look to you?
User avatar
grabiner
Advisory Board
Posts: 35722
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by grabiner »

The only reason to keep the funds in a taxable account would be if you are likely to need them before you can withdraw from the Roth IRA. Even then, maxing out the Roth IRA is likely a good idea, since you can withdraw contributions from the Roth IRA penalty-free at any time, and the growth will be tax-free. (And if you are saving for a home down payment, you can withdraw $10,000 of gains from the Roth IRA as well as long as you have had the Roth IRA for at least five years.)
Wiki David Grabiner
User avatar
PaddyMac
Posts: 1830
Joined: Fri Jul 09, 2010 10:29 pm

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by PaddyMac »

We did exactly that during the last few years when we were working and before we started withdrawing. We waited until the end of the year so we knew our tax bracket and sold brokerage assets with gains, sold some with losses to wipe out gains if that made sense (especially to keep our income low for ACA subsidy), and then moved the liquidated cash into our Roth 401k. We managed to liquidate most of it paying no taxes.
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

FiveK wrote: Tue Jun 04, 2024 6:45 pm How do the suggestions in Prioritizing investments look to you?
I will check that out, thank you
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

grabiner wrote: Tue Jun 04, 2024 8:57 pm The only reason to keep the funds in a taxable account would be if you are likely to need them before you can withdraw from the Roth IRA. Even then, maxing out the Roth IRA is likely a good idea, since you can withdraw contributions from the Roth IRA penalty-free at any time, and the growth will be tax-free. (And if you are saving for a home down payment, you can withdraw $10,000 of gains from the Roth IRA as well as long as you have had the Roth IRA for at least five years.)
Thanks David, this gives me some good food for thought.
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

PaddyMac wrote: Wed Jun 05, 2024 12:08 pm We did exactly that during the last few years when we were working and before we started withdrawing. We waited until the end of the year so we knew our tax bracket and sold brokerage assets with gains, sold some with losses to wipe out gains if that made sense (especially to keep our income low for ACA subsidy), and then moved the liquidated cash into our Roth 401k. We managed to liquidate most of it paying no taxes.
I might wait until I get closer to that retirement date as well, thx for the input
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

RyeBourbon wrote: Tue Jun 04, 2024 5:27 pm
Scoot86 wrote: Tue Jun 04, 2024 5:14 pm
RyeBourbon wrote: Tue Jun 04, 2024 4:52 pm How much and where are you investing from your employment income?
I'm currently working and funding around $20,000/year into a 401k and anticipate doing this for at least 10 more years. I'm investing in a 60/40 AA into Vanguard index stock fund and vbilx for bonds
If you're not contributing to Roth, you should consider (based on the tax owed), selling VTSAX in taxable, contributing and buying VTSAX. You have the same asset allocation, but now all growth is tax free.

I assume your 401k contributions are pre-tax and you've determined that your current tax rate will likely be higher than your retirement rate?
Exactly, pre-tax on the 401k and it is held at Fidelity. We have a Roth option at work but if I decide to fund my wife and my Roth IRA's on the Vanguard side to the max yearly amount (I think its $8,000 for each of us this year) I think I would be going over Roth contribution limit.
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

If I transfer $8,000 (or $16,000 for my wife and I) from the taxable joint account to a Roth IRA is that considered a sale and buy or can I transfer that in-kind into a Roth IRA within the contribution limits?

In other words do I have to sell out of VTSAX in the joint account and buy that amount in our Roth IRA or is there a way to just transfer it?
placeholder
Posts: 8910
Joined: Tue Aug 06, 2013 12:43 pm

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by placeholder »

Scoot86 wrote: Wed Jun 05, 2024 7:08 pm If I transfer $8,000 (or $16,000 for my wife and I) from the taxable joint account to a Roth IRA is that considered a sale and buy or can I transfer that in-kind into a Roth IRA within the contribution limits?

In other words do I have to sell out of VTSAX in the joint account and buy that amount in our Roth IRA or is there a way to just transfer it?
Yes the initial contribution must be in cash and many people have wished that they could put appreciated shares into a roth to avoid taxes but that is not allowed.
RyeBourbon
Posts: 1452
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by RyeBourbon »

Scoot86 wrote: Wed Jun 05, 2024 7:04 pm
RyeBourbon wrote: Tue Jun 04, 2024 5:27 pm
Scoot86 wrote: Tue Jun 04, 2024 5:14 pm
RyeBourbon wrote: Tue Jun 04, 2024 4:52 pm How much and where are you investing from your employment income?
I'm currently working and funding around $20,000/year into a 401k and anticipate doing this for at least 10 more years. I'm investing in a 60/40 AA into Vanguard index stock fund and vbilx for bonds
If you're not contributing to Roth, you should consider (based on the tax owed), selling VTSAX in taxable, contributing and buying VTSAX. You have the same asset allocation, but now all growth is tax free.

I assume your 401k contributions are pre-tax and you've determined that your current tax rate will likely be higher than your retirement rate?
Exactly, pre-tax on the 401k and it is held at Fidelity. We have a Roth option at work but if I decide to fund my wife and my Roth IRA's on the Vanguard side to the max yearly amount (I think its $8,000 for each of us this year) I think I would be going over Roth contribution limit.
Contributions to 401k Roth are separate from Roth IRA limits. You can contribute the full $7,000 (or $8,000) to your IRA and also contribute to Roth 401k.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
RyeBourbon
Posts: 1452
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by RyeBourbon »

Scoot86 wrote: Wed Jun 05, 2024 7:08 pm If I transfer $8,000 (or $16,000 for my wife and I) from the taxable joint account to a Roth IRA is that considered a sale and buy or can I transfer that in-kind into a Roth IRA within the contribution limits?

In other words do I have to sell out of VTSAX in the joint account and buy that amount in our Roth IRA or is there a way to just transfer it?
You have to sell the VTSAX and pay capital gains tax on it. If you need to do that to max out the Roth IRA, it's probably worth it since all future gains would be tax-free. Otherwise, you "lose" that Roth space forever.

See: https://obliviousinvestor.com/which-dol ... etirement/
Even though this talks about retirement, the concept is the same - spend some taxable funds to get money into Roth.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
Topic Author
Scoot86
Posts: 21
Joined: Wed Sep 02, 2015 10:54 am

Re: Keep funds in a taxable account vs transfer to Roth IRA

Post by Scoot86 »

RyeBourbon wrote: Wed Jun 05, 2024 8:45 pm
Scoot86 wrote: Wed Jun 05, 2024 7:08 pm If I transfer $8,000 (or $16,000 for my wife and I) from the taxable joint account to a Roth IRA is that considered a sale and buy or can I transfer that in-kind into a Roth IRA within the contribution limits?

In other words do I have to sell out of VTSAX in the joint account and buy that amount in our Roth IRA or is there a way to just transfer it?
You have to sell the VTSAX and pay capital gains tax on it. If you need to do that to max out the Roth IRA, it's probably worth it since all future gains would be tax-free. Otherwise, you "lose" that Roth space forever.

See: https://obliviousinvestor.com/which-dol ... etirement/
Even though this talks about retirement, the concept is the same - spend some taxable funds to get money into Roth.
This is great stuff, thanks RyeBourbon and everyone for their input, much appreciated
Post Reply