Converting a taxable account to a traditional or Roth IRA isn't as simple as calling your broker and having him flip a switch in a computer program. Instead, you'll need to open an individual retirement account, sell the mutual funds or other investments in your taxable account and move the cash into the IRA. The Internal Revenue Service limits the amount of money you can contribute to an IRA each year.
Freeing Up Money
To fund an IRA, you generally need to use cash. If your taxable account is tied up in stocks, bonds or similar investments, you'll need to sell them to move the money into your new retirement account. These sales will be subject to capital gains taxes, so you could lose some of your money in the process. However, you can sell investments that have lost value to help offset your gains on any assets you sell at a profit.
You can't put as much money in your IRA as you want all in one fell swoop. Since the IRS knows it's giving you a good deal, it limits how much you can take advantage of an IRA. As of 2013, you're allowed to contribute $5,500 a year to your IRA, or $6,500 if you are age 50 or older. Contributions over that amount are subject to penalties. If you have access to a retirement plan at work, your ability to deduct your IRA contributions on your taxes may be limited if you use a traditional IRA. On the other hand, if your income is too high, your ability to contribute to a Roth IRA may also be limited.
Roth or Traditional
While you're converting money in a taxable account, you may want to consider opening a Roth IRA. In a traditional IRA, you claim a tax deduction for the money you put into the account, but when you pull cash out, your contributions and earnings are taxed as regular income. Roth IRAs are the opposite. You put after-tax money in and pull all of the cash in the account out tax-free, as long as you follow IRS rules. Because you've already paid the taxes on the money in your taxable account anyway, switching to a Roth could let you make more tax-free withdrawals in the future.
If you're really serious about funding your IRA, there are a couple of ways you may be able to get more money in your account more quickly. Married people can open separate IRAs, and each of them can contribute $5,500 or $6,500 a year. In addition, the deadline to fund your IRA for the year isn't Dec. 31 -- it's when you file your tax return. In other words, if it's the beginning of the year, you could fund your IRA with the previous year's contribution and the current amount. You can only do this once.