If you've amassed a large brokerage account, you may decide to convert it to an IRA. You'll get a tax deduction for any money that you put into a traditional IRA or, if you open a Roth IRA, the money that you put in will grow tax-free for your retirement. But the IRS requires you to contribute cash to your IRA, not unsold stocks -- so you may need to sell some stock for the transfer. Plus, there are limits as to how much you can put in.
When you have a brokerage account that isn't already an IRA, you can only convert it to an IRA gradually. Every year, you'll be able to put in your maximum IRA contribution. For 2013, the maximum contribution is $5,500 or your total taxable compensation, whichever is less, and your Roth IRA contribution limit could be even lower. If you have a particularly large account, it could take years to transfer all of it over. If you're married, you can speed the process up by funding two IRAs -- one for you and one for your spouse. That way, you'll be able to transfer $11,000 in 2013.
Liquidating Stock and Bonds
You can't transfer stock or bonds into your IRA -- you can only transfer cash. If you sell shares that went up in value, you could be liable for capital gains tax on your profits. To help mitigate your capital gains tax liability, consider selling a mixture of stocks, bonds and funds that went up and ones that went down so that they cancel each other out. If you're moving the money to a traditional IRA, you can write off what you put in up to the contribution limit, but it's still nice not to have to pay capital-gains taxes.
Roth or Traditional
As you open your IRA, you have a choice to make: open a traditional IRA or a Roth IRA. In a traditional IRA, you write off the money you put in, but you pay taxes when you take it out. In a Roth IRA, you put taxable money in, but you take it out tax-free. Given that you've already paid taxes on the money that you earned and put into your taxable account, choosing a Roth is less painful than it might otherwise be. To decide which is best, ask yourself when your tax rate will be lower -- now, or when you retire. If your taxes will be lower then, a traditional IRA may be a better choice. If they're lower now, though, a Roth will likely save you more money in the long run.
Choosing IRA Assets
Some assets are better in IRAs than others. A traditional IRA taxes everything that you take out as regular income, regardless of whether it should be taxed at a lower rate or even not be taxed. With this in mind, the best thing to put in an IRA is usually an investment that would be taxed as regular income anyway. Bond funds and real estate investment trusts are frequently good for IRAs. In your Roth, you may want to invest your best long-term bets. That way, you'll get the most benefit from the account's tax-free status.
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