Socks inside an IRA
I have a client who has a traditional IRA with 4 different stocks housed inside of it. He is contemplating converting it to a ROTH IRA. My question(s) are does he have to sell the stocks first and move the cash over or can he transfer the stocks in kind over tothe ROTH? If he can do this at what price is it determined for him to pay his taxes on upon the conversion.
Thanks for your prompt response>
Tony
Permalink Submitted by Alan Spross on Mon, 2009-05-11 20:39
Tony,
He can convert in kind, and that will save commissions of selling and repurchasing. The distribution value of the conversion, ie the amount that will appear on the 1099R depends on the procedures used by the IRA custodian. Some may value the shares at the moment the conversion is processed, others might use the median price for the day, and some may use the ending value for the day as would be the case for mutual fund conversions. Client should ask the custodian if concerned about the procedures that apply. Obviously, a volatile stock and/or conversion on a large swing day can result in an unexpected tax bill. While the conversion can be recharacterized in extreme cases, to avoid that solution the custodian might be able to accept a dollar limit for the conversion to take place, but they are not likely to do that if more than one stock is to be converted. If several stocks are involved, one might also consider selling them using limit orders, then converting the cash and re purchasing. While this would incur commisions, there would be full control of the taxable amount of the conversion, reasonable control of the selling price and the repurchase price of the shares. With low discount broker accounts, it may be worth controlling the process this way.
Incidentally, these same concerns apply to the recharacterization process when securities are being recharacterized. In that case, you want the highest possible dollar amount to stay in the Roth IRA.
Permalink Submitted by Tony Paper on Mon, 2009-05-11 20:53
1. If he transfers in kind –the stocks that have appreciated–let’s just assume they transfer at that days closing price–he would owe tax on what ever the appreciated amount is. So if he bought at @ $42 and converted at $50 he would owe tax on $8 or the whole $50. Is it the same if it was a non deductible IRA contribution?
2. What is the ramifications if the stocks convertered were done so at a loss. Same stock bought at $42 now is converted at $30, I would assume there is no tax liability then on after tax contributions but what about deductible contributions.
Thanks again
Permalink Submitted by mk foss on Mon, 2009-05-11 21:07
There is never any gain or loss recognized in connection with securities held in an IRA. The conversion to Roth would be based on the market value when it occurs. The originial cost isn’t relevant.
Permalink Submitted by Alan Spross on Mon, 2009-05-11 21:25
The only exception to full taxation of the gross 1099R amount is the amount of basis in all of the client’s TIRA, SEP or SIMPLE IRAs due to non deductible contributions or rollover of after tax amounts from qualified plans. Form 8606 would be completed to show the % of the conversion that was taxable. In the unlikely event that a full conversion eliminated all of the prior IRA types, and the amount of the conversion was LESS than the basis shown on Form 8606, there would be a misc itemized deduction subject to 2% AGI limit for the amount the conversion fell short of the basis. In that case none of the conversion would be taxable either. Again, the amount actually paid for any of these stocks is immaterial.