Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA (particularly brokered CDs)

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water2357
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Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA (particularly brokered CDs)

Post by water2357 »

Does Vanguard allow in kind transfers (conversion) of assets from a Vanguard brokerage traditional IRA account to a Vanguard brokerage Roth IRA account?

If so, does that mean you could have a brokerage CD transferred (converted) in kind from your traditional IRA brokerage account to your Roth IRA brokerage account?

And if so, would Vanguard provide a market value for that CD on the day of the transfer for what would be reported as subject to federal income tax (which would be different from the purchase price of the CD)?

And then if you hold the CD to the maturity date, is it true that there would be no additional tax to be paid on the difference in value between the CD maturity value and the market value the day the CD was moved from your traditional IRA to your Roth IRA?

And/or are in kind transfers of brokerage CDs not marked to market at the time of transfer like other assets?
Last edited by water2357 on Thu Jun 23, 2022 1:07 am, edited 2 times in total.
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celia
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Re: Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA

Post by celia »

This is the same thing as in your other thread:
viewtopic.php?p=6736186#p6736186

You will pay the same tax whether you convert or move to taxable. However, when an RMD is required to be taken, you must do that first (to taxable) before you can do a Roth conversion.

But putting a CD in a Roth IRA is a terrible use of Roth space. That’s where you should put assets you expect to grow the most to maximize future tax-free growth.
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retired@50
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Re: Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA

Post by retired@50 »

water2357 wrote: Tue Jun 21, 2022 1:02 am Does Vanguard allow in kind transfers (conversion) of assets from a Vanguard brokerage traditional IRA account to a Vanguard brokerage Roth IRA account?
In my experience, the answer to this question ^^^ is yes.

I've done traditional to Roth conversions, but only with Vanguard mutual funds, never CDs, and each time, the conversion of say 100 shares is valued at the particular days' share price.

You could either just give it a try and see what happens, or you could call in advance and ask what happens.

Regards,
This is one person's opinion. Nothing more.
Topic Author
water2357
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Re: Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA

Post by water2357 »

This is the first time in quite awhile where CDs, Bonds, Treasury Notes are seeing potentially a relatively fast and substantial increase in rates. In a brokerage account it appears that CDs are valued based on these increasing rates, so the market value of a CD is decreasing just like the market value of Bonds, Treasury Notes, etc. that were issued when rates were very low.

Banks will convert CDs in traditional IRA accounts to Roth IRA accounts, but they value them at the cost of the CD plus any accrued interest reinvested in the CD. A bank CD, at least as far as the bank statement, is never presented as decreasing.

If brokerage CDs are reported to the IRS at market value based on the rising rates today, it would appear that there is an opportunity to convert the CD in kind at a lower market value and thus trigger less tax and less impact on taxable income (MAGI) than if one waits until this CD matures and converts it at its face value (now market value) or leaves the CD in the traditional IRA and ultimately pays tax on the proceeds of the CD at its face value.

I do not know at this point whether this type of conversion is really the best way to handle brokerage CDs in a traditional IRA that have decreased in value. I am only trying to understand how these brokerage CDs would be valued and reported to the IRS and if Vanguard does allow this type of in kind conversion.

It does seem that if one intends to let the CD mature, that moving it to a Roth IRA while it is valued at less than face and then allowed to mature at face, will result in less tax and ultimately yield more funds to the Roth IRA than current market value. Whether that in any way makes up for "lost" interest due to holding the CD at this point has not been examined.

Thanks for any insight as to the pros and cons and whether this type of conversion is even possible.
sycamore
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Re: Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA

Post by sycamore »

water2357 wrote: Tue Jun 21, 2022 9:57 pm This is the first time in quite awhile where CDs, Bonds, Treasury Notes are seeing potentially a relatively fast and substantial increase in rates. In a brokerage account it appears that CDs are valued based on these increasing rates, so the market value of a CD is decreasing just like the market value of Bonds, Treasury Notes, etc. that were issued when rates were very low.

Banks will convert CDs in traditional IRA accounts to Roth IRA accounts, but they value them at the cost of the CD plus any accrued interest reinvested in the CD. A bank CD, at least as far as the bank statement, is never presented as decreasing.

If brokerage CDs are reported to the IRS at market value based on the rising rates today, it would appear that there is an opportunity to convert the CD in kind at a lower market value and thus trigger less tax and less impact on taxable income (MAGI) than if one waits until this CD matures and converts it at its face value (now market value) or leaves the CD in the traditional IRA and ultimately pays tax on the proceeds of the CD at its face value.

I do not know at this point whether this type of conversion is really the best way to handle brokerage CDs in a traditional IRA that have decreased in value. I am only trying to understand how these brokerage CDs would be valued and reported to the IRS and if Vanguard does allow this type of in kind conversion.

It does seem that if one intends to let the CD mature, that moving it to a Roth IRA while it is valued at less than face and then allowed to mature at face, will result in less tax and ultimately yield more funds to the Roth IRA than current market value. Whether that in any way makes up for "lost" interest due to holding the CD at this point has not been examined.

Thanks for any insight as to the pros and cons and whether this type of conversion is even possible.
Some thoughts:

Conceptually, Roth converting a brokered CD is like Roth converting an individual Treasury or corporate bond, or a bond ETF -- they're all fixed income marketable securities. They are "marked to market". When you sell one within a taxable account, the sale market value is what's reported and what's used to determine capital gain or loss. When you Roth convert one, the market value at the time of the conversion is what's reported.

So I don't think a brokered CD is any more or less special than other fixed income investments in those regards.

I wouldn't Roth convert an investment for the sole reason that it had simply dropped in value. Presumably you have some basic reasons for doing a Roth conversions, and you should decide to Roth convert based on those reasons.

Deciding which investment to convert is another question. Let's say your Trad IRA held a CD, individual Treasuries, and a bond fund. It would make sense to first Roth convert the investment that had dropped the most in value -- as you noted it allows you to convert more of the thing than you would have otherwise.

Another thing to consider -- maybe it's worth selling the CD and buying whatever fixed income investment currently has the best mix or return/risk characteristics. Quite possibly CDs remain your preferred fixed income vehicle, but it's always worth checking.

I don't know if brokered CDs can't be transferred in-kind. Seems like that would be allowed. The CD has a CUSIP ID like other regular tradeable investments.

If your custodian doesn't allow it for some reason, you could sell the CD in the Trad IRA, transfer the cash in-kind, and then repurchase it (or whatever fixed income choice) in the Roth IRA. The main downside is being out of the market during the transfer.
Topic Author
water2357
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Re: Vanguard In Kind transfers (conversion) from Traditional IRA to Roth IRA

Post by water2357 »

Thanks for the insight on the brokered CDs and potential transfer/conversion. Vanguard, I believe, quotes/sells these CDs in $1000 minimum amounts. So, if the brokered CDs are marked to market like any other asset and you own several $1000 multiples of the same CUSIP number CD, does anyone know if Vanguard allows you to sell/transfer/convert only a portion of that holding?

For example you are holding $10,000 of a particular CUSIP number CD (same bank, interest rate, purchase/due date, etc), can you sell/transfer/convert only $5,000 of that asset?

Thanks
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