Selling stocks and placing $ in Roth IRA

[Guest calluke]

Hi, wondering if anyone has any advice for me. I have around 120 shares of stock in Pfizer, given to me from my grandmother when I was born (I'm 27). Not a lot of money, but considering it started as only a few shares in 1979, it has gone up quite a bit without doing anything to it.

More recently I have seen the stock continually fall, where my Roth IRA that i started last year has done rather nicely. My thought right now is to sell my stock and place it all in my Roth IRA, since the stocks have not done well recently, and I have not been able to add that much to my roth, (well, because i am 27, a teacher with a stay-at-home wife, a 1.5 year old, and one more on the way!).

First off, would this be a wise decision, and secondly, what sort of penalties would I have for selling my stock?

Thank you!

[papogi]

No penalties, but you would have tax to pay. Based on a chart if Pfizer going back to 1982 (didn't go back as far as 1979), it would appear that your total account value of about $3200 is made up of about $3000 in capital gains. Taxed at 15%, that comes to about $450 in taxes to pay in order to make the $3200 available to you for a Roth contribution.

I won't advise about the future investment prospects of Pfizer specifically. Its chart shows that it has either slowly fell or languished for about 5 years (along with many individual stocks since the late 90's run-up). There's little doubt that over that time frame, you would have done better in a well-diversified mutual fund.

If I were you, I would probably be willing to pay the tax and sell the stock, then add money to my Roth. Again, that's if I were in your position, knowing as much as we know based on your post.

[Guest calluke]

No penaties, but you would have tax to pay. Based on a chart if Pfizer going back to 1982 (didn't go back as far as 1979), it would appear that your total account value of about $3200 is made up of about $3000 in capital gains. Taxed at 15%, that comes to about $450 in taxes to pay in order to make the $3200 available to you for a Roth contribution.

I won't advise about the future investment prospects of Pfizer specifically. Its chart shows that it has either slowly fell or languished for about 5 years (along with many individual stocks since the late 90's run-up). There's little doubt that over that time frame, you would have done better in a well-diversified mutual fund.

If I were you, I would probably be willing to pay the tax and sell the stock, then add money to my Roth. Again, that's if I were in your position, knowing as much as we know based on your post.

Thank you papogi for your reply. I had posted the same question about my stocks last year at this time. At that moment, i was wondering if i should sell my stocks to start my roth, but since i had 10K in cash, i was advised to start it with that and keep the stocks. Well, this is how my life has changed since then...

After purchasing new windows (greatly needed!), my wife and I have only a few thousand left in our checking. Since we decided to invest back into our home, we were unable to put anything in our roth this past year. To me, it makes sense to now sell my stocks (that haven't done well) and put them into the roth (which has done very well). Is this a good financial decision?

[John G]

The best answer is no one can tell. Markets are unpredictable. Health, medical devices and pharmaceuticals have had a couple bad years after many years of above average performance. The performance of a specific drug company is effected by new drugs, government regulations of drugs, government supported health care programs, drugs coming off patents, law suits, etc. This could be a turnaround year... or not. I can tell. No one can tell with any kind of certainty.

You do need to continue to put some funds into your Roth each year. It sounds like that is a strain, but a small regular contribution will help build this future nest egg.

The problem with owning a small number of shares in one company include lack of diversification and transaction costs (commissions) to sell. If your Roth is with a discount broker, you may be able to get them to sell the shares with a commission under $30. Then you need to remember that you will have a tax obligation. You can then decide if you need those dollars as an emergency reserve or if you can put some into your Roth.

Don't forget to look into your school districts 403b or similar plan. Programs with a match should get a high priority.

[Guest calluke]

The best answer is no one can tell. Markets are unpredictable. Health, medical devices and pharmaceuticals have had a couple bad years after many years of above average performance. The performance of a specific drug company is effected by new drugs, government regulations of drugs, government supported health care programs, drugs coming off patents, law suits, etc. This could be a turnaround year... or not. I can tell. No one can tell with any kind of certainty.

You do need to continue to put some funds into your Roth each year. It sounds like that is a strain, but a small regular contribution will help build this future nest egg.

The problem with owning a small number of shares in one company include lack of diversification and transaction costs (commissions) to sell. If your Roth is with a discount broker, you may be able to get them to sell the shares with a commission under $30. Then you need to remember that you will have a tax obligation. You can then decide if you need those dollars as an emergency reserve or if you can put some into your Roth.

Don't forget to look into your school districts 403b or similar plan. Programs with a match should get a high priority.

thank you for your reply john g. i remember you were one of a few that gave me great advice last year. my roth is with vanguard in a retirement ira that changes the closer i get to retirement. the only fee is $10/year if i am under $5000 in the account. the 403b's in my district have an unbelievable amount of fees with no match, that is why i went with the no-load roth ira.

i realize that over the past 27 years that i have had the stocks, that it has grown from just a few shares to over 120 without adding to it. but i also realize that the roth ira will be my main source of extra income (i will get a pension as a teacher) when i retire, and since i have not been able to add to it this past year (because of home improvements) i thought now would be a good time to sell the stocks to add to my roth.

i guess i was just looking for the positives and negatives of selling my stock now to put towards my roth.

[John G]

Investing in your home is generally a good idea, more so if you are putting in sweat equity and get to enjoy the improvements.

I think your primary problem is on the income side. You might want to look around for a way to boost your income by a home based job for your wife, part time on weekends, or a summer temp position. If you could find a way to generate 4K or 8K, you could more aggressively fund your Roth.

Given you limited cash resources, I would be inclined to sell the stock and put those funds 1/2 into your Roth and 1/2 into cash reserve. You will have a tax hit, but frankly the certificate isn't helping you.

[Guest calluke]

Investing in your home is generally a good idea, more so if you are putting in sweat equity and get to enjoy the improvements.

I think your primary problem is on the income side. You might want to look around for a way to boost your income by a home based job for your wife, part time on weekends, or a summer temp position. If you could find a way to generate 4K or 8K, you could more aggressively fund your Roth.

Given you limited cash resources, I would be inclined to sell the stock and put those funds 1/2 into your Roth and 1/2 into cash reserve. You will have a tax hit, but frankly the certificate isn't helping you.

Hi John -

We had 50 year old windows and with the price of oil, our heating bills were sky high. We will be in the home at least another 10 years so we thought that was an investment we had to make. The good thing is, we just got the windows in, and they will be paid off by the summer so there will be no debt!

Also, my wife does have a few part-time jobs. She gives private music lessons, is a choir director at our church, and teaches at a private school 2 mornings a week. On the weekends, we also serve as youth pastors for our church youth group. Not a ton of $, but every little bit helps. Normally we would be able to add to our roths, but since we wanted to pay off our windows in less than a year ($11,000), we had nothing leftover to add. That is why I thought I would use the stocks to contribute since they have not been doing much for me lately. It seems like you would agree! Thanks again for your help.