There are two types of IRAs: traditional and Roth. Both are tax-advantaged ways to save for retirement. They can be set up at a bank, an insurance company, a brokerage house or other financial institution. While you can use the money in your IRA to invest in some types of property, such as stocks, you may only fund the retirement account with cash and cannot transfer stocks from a brokerage account.
Cash contributions to a traditional IRA must be made from money that normally would be taxed, such as wages, tips and bonuses. The contribution, up to annual maximums set each year by the IRS based on tax status and income, is then deducted from taxable income when you file your federal income tax. For 2018, that maximum is $5,500, or $6,500 if you're age 50 or older, or your earned taxable income for the year, whichever is less, or if you file as single, your modified adjusted gross income is $62,000 or less. The money grows tax-deferred and, when withdrawn, is taxed as ordinary income.
The amount of money you can contribute to a Roth is limited by how much you contribute to a traditional IRA, may be limited by your income and may also be affected by whether or not you have a tax-deferred retirement plan at work. The annual maximum, as in the example above, applies to the total contributed to a traditional IRA, a Roth IRA, and a tax-deferred plan at work. For 2013, a taxpayer filing as "single" with an adjusted gross income of $118,000 or less can contribute the annual maximum to a Roth. The money deposited in a Roth IRA is after-tax dollars and grows tax-free. You do not have to pay federal income tax on withdrawals if you are over 59 1/2 years of age when you take the money out and the money has been in the account for a minimum of five years. As with a traditional IRA, contributions to a Roth IRA must be made in cash.
Funds from one traditional IRA can be transferred to another traditional IRA, called a trustee-to-trustee transfer. Because you do not take possession of the money, it's not necessary to liquidate the holdings in the original account. In this case, stocks in the old IRA can be rolled over to the new IRA. It does not apply if the stocks are held in a regular brokerage account.
Traditional IRA to Roth IRA Conversion
If the financial institution holding your traditional IRA investments allows this, it can move the holdings, without liquidating them, from a traditional to a Roth IRA. This transfer, however, incurs a tax liability on the value of the holdings being moved to the Roth and will be taxed as ordinary income. This is sometimes done for financial planning reasons, such as the taxpayer expecting to be subject to a higher tax rate in the future, in which case it makes more sense to pay income tax on the money now rather than later.
- Can I Convert a Standard IRA to a Roth With No Income?
- Can I Have Both a Roth IRA & a Traditional IRA at the Same Institution?
- IRA Certificate of Deposits and How They Work
- Can I Convert My After-Tax Contributions to a Roth IRA?
- Can a Roth Conversion Be Moved in Kind?
- How Does the Roth IRA Work?
- Tax Consequences for the Beneficiary of a Decedent's IRA
- Can I Convert an Employee Savings Plan to a Roth IRA?