Gifting stock and Roth question

[harley]

Many years ago I took $5K that I was putting away for DDs college fund and bought some stocks with it. The account was in my name, since I figured I'd eventually sell it and just use the proceeds to pay tuition. I got real lucky during the go-go 90s, then lost a bunch during the tech bust. But it built back up since then, and even with the recent financial hiccup it's worth about $45K.

DD never did go to college. She's now a single mom with a low paying job who is working hard and learning about life. We're not helping her much so she can do it herself, although she knows we're there if things really go to heck. But though she is getting by OK and has even saved a decent emergency fund, she doesn't have any money to spare to fund an IRA or 401(k).

What I would like to do is gift her some of the stocks, then have her move them into a Roth IRA. It seems like a good time to do it, since the prices are down so I can give more shares for the same amount of money. I would like to give her $8K worth so she can put some in the Roth this year, and the rest in the Roth Jan. 2. I've found a fair amount of info regarding her basis for the stocks I gift to her. However, I haven't seen anything about how to figure the amount when I gift it. Is the value based on the stock price at close of day of the day I do the transfer? Or is there some other way it's determined? Also, can she move the stock directly into a Roth (within the $4K contribution limit of course)? Or do I have to sell it, pay the capital gains tax, gift her the money, and then have her put it in the Roth? I would appreciate any help y'all can give on this one.

 

[OAG]

This is kind of short and sweet: Can I give stock as a gift?

 

[OAG]

May here: Fool.com: Gifting Appreciated Stock [Tax Q&A] May 31, 2002
Kind of dated but may help.

 

[LOL!]

I cannot believe that you have not found that the cost basis of the investment you give to your daughter is YOUR cost basis. Also, one cannot fund a Roth without cash ostensibly from wages or job earnings. That is, you cannot put stocks purchased outside the Roth IRA into it. You must put cash in, then buy stocks/funds.

That means if you should only gift stock to your daughter if you expect her to sell it and pay lower taxes than you would and that she would also put it in a Roth IRA.

You are better off dying and letting her inherit the stock gains tax free. Maybe just give her cash instead?

Whatever you do, don't give her investments without a complete documented detail of your cost basis. We see posts her from time to time with the question: "My dad/grandmother/aunt gave me stock in 1971. I sold it last year How do I figure out the gains and taxes?"

 

[harley]

The one from TMF was helpful for the gift portion, and actually gave me an idea. But still no answer on moving stocks into a Roth.

The idea is that if we have to sell the stock toput the money in the Roth, I can gift it to her, getting the cap gains out of my hands. And since she is in such a low tax bracket she can sell the stock with a 0% capital gains tax. Excellent! I just have to get her to promise to put the money in the Roth.

 

[harley]

I cannot believe that you have found that the cost basis of the investment you give to your daughter is YOUR cost basis. Also, one cannot fund a Roth without cash ostensibly from wages or job earnings.

Not sure what you mean. The documentation is very clear about gifting stock. If it's appreciated, then the recipient's cost basis is the same as the giver's. That's our sitation. And she does have an income, just not enough free money to put into a retirement account herself.

That means if you should only gift stock to your daughter if you expect her to sell it and pay lower taxes than you would and that she would also put it in a Roth IRA.

Yep, that's the situation, assuming she can't move the stock into the IRA directly. And her bracket is low enough to have a 0% cap gains tax this year.

You are better off dying and letting her inherit the stock gains tax free. Maybe just give her cash instead?

I want her to get the money in a Roth now, for tax free growth and before the gov't does away with it. It won't do her any good to wait the 40 or 50 years until I plan to kick off. And this should be better than cash, since it gets me off the hook for some cap gains. The gov't can't be trusted with money. It's our patriotic duty to keep it out of their hands.

Whatever you do, don't give her investments without a complete documented detail of your cost basis. We see posts her from time to time with the question: "My dad/grandmother/aunt gave me stock in 1971. I sold it last year How do I figure out the gains and taxes?"

Good advice there. I'll make sure to follow it.

 

[Martha]

She will pay tax on the difference between the value of the stock when she sells it (OR puts it in a Roth), and your cost basis. She gets your holding period so the gains are long term. With her bracket, not a bad idea.

 

[2B]

I set up brokerage accounts for all my kids while they were in college. I gifted stock to them which "they" sold to pay for their tuition, fees etc. The capital gains were all at their zero tax rates. It worked out very well having the government fund almost 15+% of my kids' college expenses. The "+" is due to the fact that for some of the years the 15% limit on capital gains wasn't in place.

 

[LOL!]

I edit my earlier response to put in some missing words which really messed up what I really meant to type.

 

[harley]

She will pay tax on the difference between the value of the stock when she sells it (OR puts it in a Roth), and your cost basis. She gets your holding period so the gains are long term. With her bracket, not a bad idea.

So does this mean she can put the stock in directly, and just pay the tax (basically $0)? It only makes a difference as far as the transaction fees. I'm really cheap.

If she does sell and put the money into the Roth, maybe she can repurchase the stock at a lower price, if it's one of the down swinging days. That would be even cooler, saving the tax and getting more shares for the money, then never having to pay taxes on the increase when she retires. Seems like the gov't slipped up on this one.

 

[Nords]

So does this mean she can put the stock in directly, and just pay the tax (basically $0)? It only makes a difference as far as the transaction fees. I'm really cheap.

You're wriggling pretty hard on the hook, Harley, but all that I've ever read about IRA contributions is in terms of compensation-- cash. No stock, no property. And if she doesn't have any compensation (earned income) or if certain other pension plan restrictions apply, then she may not even be eligible to contribute to an IRA regardless of how much you gift her.

Take a look at pages 7-9 of IRS Pub 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf) but if that's not good enough for you then you're going to have to look up the tax code or a tax lawyer.

Or you can try to find an IRA custodian who's willing to do it the way you want to do it. My guess is that they'll all expect you to sell the stock and deposit the cash. And if the IRS' computers can't match the IRA contributions to a W-2 or similar evidence of earned income then it's considered an excess contribution.

 

[NW-Bound]

Same as Nords, I believe that the only contribution to be made into IRA or Roth IRA is to be made with CASH. Reasonably, the IRS does not want you to circumvent the dollar amount limit you can contribute each year by contributing highly appreciated assets with low cost basis.

Imagine if Buffet could transfer into his grandchildren's IRAs some of his A shares worth $110K now with a cost basis of less than $100 per share.

The only way equities can be transferred into an IRA is from another IRA or a 401k belonging to the same individual. That is OK because these accounts are all tax deferred.

 

[OAG]

Same as Nords, I believe that the only contribution to be made into IRA or Roth IRA is to be made with CASH. Reasonably, the IRS does not want you to circumvent the dollar amount limit you can contribute each year by contributing highly appreciated assets with low cost basis.

Imagine if Buffet could transfer into his grandchildren's IRAs some of his A shares worth $110K now with a cost basis of less than $100 per share.

The only way equities can be transferred into an IRA is from another IRA or a 401k belonging to the same individual. That is OK because these accounts are all tax deferred.

She does have a "low paying job". So she could maybe "fund" the IRA with here earnings and cash out the stock for living expenses! I think we are over complicating this, at least in OP and his daughters case.

 

[harley]

She does have a "low paying job". So she could maybe "fund" the IRA with here earnings and cash out the stock for living expenses! I think we are over complicating this, at least in OP and his daughters case.

Yeah, it's not an issue of her not being eligible. And there's no problem with using gifted money to fund an IRA, as long as she earns at least as much as she contributes to the IRA. Her job is low paying, but low paying to the tune of $25K. In Northern VA that's barely survival.

I considered why I'm pushing the transfer so hard, and I think it's just emotional. I've had these stocks a long time and would prefer not to give them up. But we know you shouldn't mix emotion with investing. So I'm going to gift her the shares, let her sell them (avoiding the cap gains tax) and put the money in the Roth. As T-Al says, let the gov't fund 15% of her IRA. Then if we decide it's the right investment for her, we can buy them again. Good dividend paying companies aren't the worst start for a young investor. Later when the bottom line increases I can teach her about indexing.

Thanks all.