How to Convert Depreciated Stock to a Roth IRA

When you have invested in stock through a traditional IRA or 401(k), a loss in value can be hard to stomach. After all, that's money you are hoping to live on during retirement. However, converting depreciated stock from a pretax retirement account to a Roth IRA can be beneficial. Although you’ll pay income taxes on the amount of the stock being converted, you won’t pay any taxes when you cash out the shares in a Roth IRA at retirement. With a Roth, you could also pass the stock tax free to your heirs. If you leave your depreciated stock in a pretax account, you will have to start taking distributions at age 70 1/2 and pay tax on each distribution.

Step 1

Get the conversion form from your brokerage company. Your brokerage might make the form available online. Otherwise, request it by mail or email.

Step 2

Complete the paperwork. You need to type in the number of the account where the stock is held and the Roth account number. Specify the number of shares you want converted. Check the box that indicates you don't want taxes withheld. You will pay the taxes on the conversion, using nonretirement money, when you file your tax return.

Step 3

Report the amount of the conversion when you file your taxes. You will have to file Form 8606 to inform the IRS of the conversion amount.

the nest