There’s a price for success. In the financial world, it’s called capital gains taxes. When you invest in any asset and sell it for a profit, the IRS calls the profit a capital gain. It also calls it subject to taxation. While tax rates on capital gains usually aren’t as steep as regular income taxes, they’re essentially unavoidable. Rolling invested gains into a Roth IRA is certainly possible – and is a move your retirement planner would cheer – but the maneuver is without tax advantage. You’ll still pay gains taxes on your earnings. But thanks to the rules of Roth IRA contributions and distributions, won’t need to pay taxes on the funds when you retire.
Identify the securities or other asset you want to sell to create the capital gain. Contact your broker or real estate agent to put in an order to sell them. The IRS limits annual contributions to Roth IRAs to $5,000 if you're under 50 and $6,000 if you’re 50 or older. You also can’t contribute more than your taxable compensation for the year. So if you’re unemployed or living off investment income, you’ll have to wait to contribute to your Roth. Because of these contribution limits, you might not be allowed to roll the entire capital gain over into your Roth.
Calculate the gains tax you owe for selling your assets. Depending on how long you held onto the asset before you sold it, the gains tax could be between 0 and 15 percent of the profit. Placing the gains into a Roth IRA doesn’t relieve you of your responsibility to pay capital gains taxes. Therefore, you should withhold your tax obligation from the profits to ensure you’ll meet your tax obligation come April 15.
Write a check or receive a money order for the value of the gains you want to transfer to your Roth IRA. Contributions to a Roth can only be made in cash, so you can’t transfer stocks or other securities directly into a Roth. Provide these funds to your brokerage with instructions to invest it in your Roth IRA. If your brokerage offers it, you can also select similar stocks to invest in your Roth with the gains.
- The IRS calculates capital gains taxes on all the transactions you make in a tax year, and allows you to offset capital gains with capital losses. So if you’re thinking of dumping bad investments, couple their sales with profitable ones. You receive a dollar-for-dollar offset for capital losses against capital gains, which can greatly reduce your tax liability.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.