How to Transfer Stock Positions From a Traditional IRA to a Roth IRA

You can convert stock in a traditional IRA straight to a Roth IRA.

You can convert stock in a traditional IRA straight to a Roth IRA.

If you’ve been putting money away in a traditional individual retirement account, the Internal Revenue Service allows you to convert your retirement savings to a Roth IRA. Conversions make the most sense when you’re currently in a lower tax bracket than you expect to be paying in retirement because the taxes you pay on a conversion now will be less than the taxes you’d pay on the distributions from your traditional IRA in retirement. Though typically you transfer cash to complete a conversion, you can also transfer stock positions from a traditional IRA to a Roth IRA.

Property Conversions Permitted

The IRS allows you to move either cash or property from your traditional IRA to your Roth IRA. Stocks count as property, which means that rather than taking out cash from your traditional IRA and putting it in a Roth IRA, you can simply take out the stocks and redeposit them in your Roth IRA. For example, if you own a certain stock in your traditional IRA and want to continue to hold that same stock in your Roth IRA, you can move the shares rather than having to sell the shares, move the money, and then reinvest in the same stock.

Conversion Methods

You can move your stock positions from your traditional IRA to a Roth IRA with either a direct transfer or a rollover. With a direct transfer, your financial institution moves the stock positions for you. With a rollover, you request a distribution of the specific stocks you want to rollover and then within 60 days, you redeposit those same stocks in your Roth IRA. For example, you might have them transferred to your brokerage account temporarily before moving them to your Roth IRA, or you might even receive the physical stock shares. The danger of doing a rollover is that if you miss the 60-day deadline, it’s a permanent distribution.

Tax Implications

The amount of your conversion usually adds to your taxable income for that year. Even though you’re transferring stocks, you still have to pay the higher ordinary income tax rates on the conversion rather than the lower capital gains rates. For example, say you transfer stock worth $15,000 from your traditional IRA to a Roth IRA, you haven't made any nondeductible contributions, and you fall in the 25 percent tax bracket for the year. You owe an extra $3,750 in income taxes when you file your return. If you’ve made nondeductible contributions to the account, a fraction of your conversion will be nontaxable.

Tax Reporting

Completing a Roth IRA conversion means you must use Form 1040 or Form 1040A for your annual tax filing, not Form 1040EZ. As of 2013, if you use Form 1040, write the amount of the conversion on line 15a, use Form 8606 to figure the taxable portion, and report the taxable portion on line 15b. For Form 1040A users, the total conversion goes on line 11a, you use Form 8606 to figure the taxable portion, and then you report the taxable portion on on line 11b. As long as the stocks you took out of your traditional IRA end up in the Roth IRA, either by transfer or by rollover, you won’t owe any early withdrawal penalties.

 

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