How do I Move Shares From a Taxable Account to an IRA?
Individual retirement accounts shelter investments from current taxes. By switching your investing activity from a taxable account to an IRA, you will postpone and possibly completely avoid taxes when you take your money back out. Several rules limit what you can contribute to an IRA and the maximum amount you can contribute in a year.
You receive a tax deduction when you contribute to a traditional IRA, but you must treat withdrawn money as ordinary income, taxed at your marginal rate. Roth IRAs offer no tax deduction but do allow you to distribute money tax-free, assuming you follow the rules against early withdrawal. You can contribute only one type of asset to an IRA: cash. This means that if you want to move the stocks in your taxable account to an IRA, you must first sell them, contribute the cash and then repurchase the shares.
As of 2013, you can contribute $5,500 to an IRA, but if you’re 50 or older, the limit rises to $6,500. You cannot contribute more than your gross income. Roth IRAs have income limits that affect how much you can contribute. If your modified adjusted gross income falls between $112,000 and $127,000, the IRS reduces the amount you can contribute to a Roth IRA. MAGI above the top of the range prohibits you from contributing. For married couples filing jointly, the range is $178,000 to $188,000.
If you sell shares at a loss in your taxable account and repurchase them within 30 days, it’s a wash sale and the loss is deferred. However, if you repurchase the shares in an IRA, you create an irretrievable loss. Normally, if you execute a wash sale in your taxable account, you cannot immediately deduct the loss. Instead, you must add the disallowed loss to the cost basis of the replacement shares. This will reduce your capital gain or widen your capital loss when you eventually sell the replacement shares. However, because you don’t pay taxes on IRA investments, you permanently lose the deferred loss on wash sale shares repurchased in your IRA.
If you are accustomed to removing money from your taxable account at will, you might feel hemmed by an IRA. With a few exceptions, the IRS will charge a 10 percent penalty tax on withdrawals before age 59 1/2, although, at any time and without penalty, you can remove money on which you’ve already paid taxes. Without exception, you’ll draw the penalty if you siphon earnings from your Roth IRA before the account’s fifth anniversary. Otherwise, the permitted exceptions to the early withdrawal penalty include death, permanent disability and spending for qualified education costs, medical expenses and buying or building your first home.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.