Can I Transfer the Securities in My IRA to a Roth Without First Selling Them?
You can directly transfer securities in your traditional Individual Retirement Account, or IRA, to a Roth IRA without first selling them. This can be a smart move, particularly if you have stocks in your IRA that you think are undervalued. Once you pay your conversion tax bill, you benefit from tax-free Roth IRA withdrawals in the future.
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Transferring Securities
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To transfer securities between trustees, first open a Roth IRA with a new brokerage firm. Your new broker can provide specific instructions on making the conversion, but generally you must tell your old broker to transfer your securities to the new broker's address. You can also have your broker release the security certificates directly to you so you can redeposit them yourself within 60 days. However, cash and securities that a broker releases to you are subject to a mandatory 20 percent federal withholding.
Partial Transfers
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You are welcome to cherry pick which securities you want to convert. For example, you can instruct your broker to only transfer shares of a particular stock or mutual fund, liquidate your other assets and send them in cash. Moreover, you are under no obligation to completely empty your traditional IRA if you want to keep some assets in that account.
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Conversion Taxes
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Roth IRAs allow you to take advantage of tax-free investment growth and, eventually, tax-free withdrawals, but you must pay income taxes on contributions. Therefore, if took you deduction for your traditional IRA contributions, you owe the IRS income taxes on amounts you convert to a Roth IRA. Of course, you may not have deducted all of your traditional IRA contributions; in which case, you do not owe taxes on non-deductible amounts you convert.
Figuring Taxes on Deductible Contributions
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To determine the taxable portion of your IRA, the Internal Revenue Service looks at your total contributions to all of your traditional IRAs. For example, if your traditional IRA contributions totaled $20,000 and $5,000 of that amount was non-deductible, you would be exempt from income taxes on $20,000 divided by $5,000, or 25 percent, of your conversion. If your traditional IRA worth is $50,000 when you convert it to a Roth IRA, you owe income taxes on $37,500.
Paying Taxes
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To determine how much your IRA securities are worth, your IRA trustee can provide you with a fair market value statement that lists a dollar amount. To pay your tax bill, you can have your old trustee liquidate a portion of your securities or you can pay the amount out of pocket. Paying the bill from your IRA could take a serious chunk of your nest egg, whereas paying the bill out of pocket allows for uninterrupted growth.
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