Funding Roth IRA from Taxable Brokerage

[Austin704]

Greetings!

Questions: Can my sister transfer funds directly from her taxable brokerage sweep fund to a Roth IRA (both at Schwab) as long as she has enough taxable income (W2) to cover the contribution? Would it be better for her to move the $$ from the taxable account to her checking account first, then transfer from checking to the Roth IRA or does it matter?

Background: My sister has earned income of roughly $75k per year and has most of her retirement savings in a taxable brokerage account. Two years ago we set up a Roth IRA for her and she contributes $2400 per year from her paycheck via her checking account. She has a few laddered CDs in her taxable brokerage and it occurred to me that she could transfer those funds at maturity to the Roth IRA (up to the $7500 limit > 50 yrs) since she has sufficient earned income to cover the contribution. She does not currently contribute to a workplace retirement account.

I understand there are income limits on Roth IRAs (she does not appear to be anywhere close as a single filer) and that contributions to a workplace account can result in limits on Roth IRA contributions (she does not currently have any). So it appears she could contribute $5100 to the Roth this year in addition to the $2400 she already contributes.

Am I missing something here?

Many thanks!

 

[Koolau]

I think that is correct and I don't think it maters where she gets the taxable funds to send to the Roth custodian. Others will gladly chime in if I'm wrong.

 

[Al18]

The bigger issue is why isn’t she investing in stock index funds in the taxable brokerage account? If she holds the stock index funds at least 1 year, she can take advantage of the 0% LTCG rate.

 

[ut2sua]

Greetings!

Questions: Can my sister transfer funds directly from her taxable brokerage sweep fund to a Roth IRA (both at Schwab) as long as she has enough taxable income (W2) to cover the contribution?

This sounds OK to me (as long as she has enough earned income as you have mentioned). The IRS only care about the $ amount (as long as that doesn't exceed their tax limit).
Also, I was able to transfer stock in kind from an IRA to a Roth account with Fido. I think she may be able to do the same from her brokerage account to her Roth account. Just make sure the $ value of the stock transfer is within the allowed limit

 

[jazz4cash]

Greetings!

Questions: Can my sister transfer funds directly from her taxable brokerage sweep fund to a Roth IRA (both at Schwab) as long as she has enough taxable income (W2) to cover the contribution? Would it be better for her to move the $$ from the taxable account to her checking account first, then transfer from checking to the Roth IRA or does it matter?

Background: My sister has earned income of roughly $75k per year and has most of her retirement savings in a taxable brokerage account. Two years ago we set up a Roth IRA for her and she contributes $2400 per year from her paycheck via her checking account. She has a few laddered CDs in her taxable brokerage and it occurred to me that she could transfer those funds at maturity to the Roth IRA (up to the $7500 limit > 50 yrs) since she has sufficient earned income to cover the contribution. She does not currently contribute to a workplace retirement account.

I understand there are income limits on Roth IRAs (she does not appear to be anywhere close as a single filer) and that contributions to a workplace account can result in limits on Roth IRA contributions (she does not currently have any). So it appears she could contribute $5100 to the Roth this year in addition to the $2400 she already contributes.

Am I missing something here?

Many thanks!

I've done it that way at Fidelity many times with no issues. The limit for 2024 is $8k. Fidelity shows the contributions to date on the main page when I log in. This got me wondering if it is possible to transfer the CD in-kind from the taxable brokerage so the interest comes into the Roth without being taxable but I looked it up and only cash contributions are permitted.

 

[jazz4cash]

This sounds OK to me (as long as she has enough earned income as you have mentioned). The IRS only care about the $ amount (as long as that doesn't exceed their tax limit).
Also, I was able to transfer stock in kind from an IRA to a Roth account with Fido. I think she may be able to do the same from her brokerage account to her Roth account. Just make sure the $ value of the stock transfer is within the allowed limit

Really? On the Fidelity site and Investopedia it says Roth contributions must be made in cash, but I can't find that restriction on the (very) convoluted IRS Pub 590.

 

[TheWizard]

Really? On the Fidelity site and Investopedia it says Roth contributions must be made in cash, but I can't find that restriction on the (very) convoluted IRS Pub 590.

That seems like a reasonable rule given the $8000 annual limit.
ETF prices bounce around, so doing an in-kind transfer of N shares of something would be tricky and could end up being more than $8000.

Plus, the IRS would like to get any CG tax due before the transfer happens...

 

[ut2sua]

Really? On the Fidelity site and Investopedia it says Roth contributions must be made in cash, but I can't find that restriction on the (very) convoluted IRS Pub 590.

I was able to do it online by myself with Fido. I clicked the "transfer" button and chose to transfer from my IRA to Roth. Fido warned me that there will be tax consequences, and I was able to transfer in kind. The $ amount is calculated at the time of the transfer since my transfer was an ETF (VTI etc.). I would imagine a mutual fund in kind transfer value would be calculated at the end of the trading day (I prefer transferring ETF since I know the transfer value for sure).

 

[ut2sua]

ETF prices bounce around, so doing an in-kind transfer of N shares of something would be tricky and could end up being more than $8000.

From my personal experience, Fido was able to give me the ETF price at the exact time I clicked the transfer submit button. I know that because at the end of the day, the ETF value went up, and I was given the value at the transfer time. I think Fido is very good in handling this task.

 

[SecondCor521]

Really? On the Fidelity site and Investopedia it says Roth contributions must be made in cash, but I can't find that restriction on the (very) convoluted IRS Pub 590.

Roth conversions (from traditional IRA to Roth IRA) may be done in-kind.

Contributions to IRAs (either to Roth IRA or traditional IRA) must be done in dollars:

"Contributions, except for rollover contributions, must be in cash. See Rollovers, later."

-- Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

 

[TheWizard]

I was able to do it online by myself with Fido. I clicked the "transfer" button and chose to transfer from my IRA to Roth. Fido warned me that there will be tax consequences, and I was able to transfer in kind. The $ amount is calculated at the time of the transfer since my transfer was an ETF (VTI etc.). I would imagine a mutual fund in kind transfer value would be calculated at the end of the trading day (I prefer transferring ETF since I know the transfer value for sure).

Ok, but this is a Roth CONVERSION, not a contribution...

 

[ut2sua]

Ok, but this is a Roth CONVERSION, not a contribution...

That was correct. It sounds like contribution needs to be cash as mentioned by SecondCor521 above.

 

[Al18]

The OP says this is a contributation.

 

[MarieIG]

I don't see an issue making a contribution from a Schwab sweep taxable brokerage account into a Roth, as long as the earned income requirements are satisfied.

Your sister can even get a Schwab rep on the phone who can "hold her hand" while this is being done.

 

[TheWizard]

I don't see an issue making a contribution from a Schwab sweep taxable brokerage account into a Roth, as long as the earned income requirements are satisfied.

Sounds like you're talking about a money market settlement fund. That should be ok...

 

[jazz4cash]

Roth conversions (from traditional IRA to Roth IRA) may be done in-kind.

Contributions to IRAs (either to Roth IRA or traditional IRA) must be done in dollars:

"Contributions, except for rollover contributions, must be in cash. See Rollovers, later."

-- Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

Thanks. I looked and looked, and I finally found the rule by using "Find on Page" and searching for "cash". It was the 2nd instance. I was a bit surprised that traditional IRA contributions are also limited to cash, but I guess rollovers can be property.

 

[Austin704]

The bigger issue is why isn’t she investing in stock index funds in the taxable brokerage account? If she holds the stock index funds at least 1 year, she can take advantage of the 0% LTCG rate.

She is, fortunately. Only about 5% of her holdings in the brokerage are in fixed income.

 

[Austin704]

I've done it that way at Fidelity many times with no issues. The limit for 2024 is $8k. Fidelity shows the contributions to date on the main page when I log in. This got me wondering if it is possible to transfer the CD in-kind from the taxable brokerage so the interest comes into the Roth without being taxable but I looked it up and only cash contributions are permitted.

Thank you for the additional detail. That would have been even better.

 

[Austin704]

I was able to do it online by myself with Fido. I clicked the "transfer" button and chose to transfer from my IRA to Roth. Fido warned me that there will be tax consequences, and I was able to transfer in kind. The $ amount is calculated at the time of the transfer since my transfer was an ETF (VTI etc.). I would imagine a mutual fund in kind transfer value would be calculated at the end of the trading day (I prefer transferring ETF since I know the transfer value for sure).

I assume that the "tax consequences" to which you refer implies that the in-kind transfer of equities from a brokerage to a Roth IRA would result in the realization of capital gains. The transfer wouldn't allow one to sidestep the capital gains tax... Too good to be true?

 

[MarieIG]

Sounds like you're talking about a money market settlement fund. That should be ok...

The Schwab has a sweep account which is used for purchases and is a cash equivalent. It earns much less interest than their money markets. I don't have an IRA at Schwab, but

Sounds like you're talking about a money market settlement fund. That should be ok...

I believe it's a cash equivalent. Not a Roth, but a buddy of mine recently funded his traditional IRA over at Schwab from his brokerage sweep account.

 

[Austin704]

Roth conversions (from traditional IRA to Roth IRA) may be done in-kind.

Contributions to IRAs (either to Roth IRA or traditional IRA) must be done in dollars:

"Contributions, except for rollover contributions, must be in cash. See Rollovers, later."

-- Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

Thanks for clarifying. That takes in-kind contributions from taxable to Roth off the table.

 

[Austin704]

Sounds like you're talking about a money market settlement fund. That should be ok...

Yes, it's the default fund that Schwab uses when money is moved to or from the account or when funds are liquidated.

 

[U1964]

Yes, it's the default fund that Schwab uses when money is moved to or from the account or when funds are liquidated.

I've made Roth contributions at Schwab from this settlement account many times. Most recently a few days ago. It's a straightforward process online:
1) From the "Move Money" menu select "Online Transfer"
2) Select the From and To accounts.
3) If the To account is a Roth IRA it will display current and previous year contributions and ask for the tax year to apply for this transfer
4) Supply tax year, amount, transfer frequency, and transfer date
5) Funds show up immediately in the Roth

 

[ut2sua]

I assume that the "tax consequences" to which you refer implies that the in-kind transfer of equities from a brokerage to a Roth IRA would result in the realization of capital gains. The transfer wouldn't allow one to sidestep the capital gains tax... Too good to be true?

In the world of IRA and Roth accounts, there is no concept of capital gains. What matter is the amount of $ that one transfers from IRA to Roth (it does not matter if one has gain or loss within that amount of money). The transferred amount is counted as part of one's income for that year. So, if you transfer $10K from IRA to Roth, then $10K will be added to your income for that year. It does not matter if the $10K has $9K of gain or $0 gain (or any loss for that matter). That is why traditional IRAs are "before tax" account.
Hope the above helps.
Edit: I reread your question. Everything mentioned above still applies, but I didn't answer your question. For brokerage account, I think the reason cash is required to contribute to an IRA or Roth account is so that any capital gain/loss are dealt with before the cash can be "contribute" to a pretax or tax free account. So yes, uncle Sam will get his share (if any) of your $ as you cash out your stock in this case.

 

[Texas Proud]

WOW, lots of responses but I did not read them all...

We have also done it at FIDO with DD.... but I do think we sold something and transferred cash...