Stocks to IRA

[Guest ucirsharma@yahoo.com]

Hello,

I am a young investor that has been pretty active in the stock market. I initially started with $20,000 and have grown it substantially within the past year. Should I even consider a an IRA at this time? Im leaning towards a traditional IRA because I eventually I will be making more than 95K which would not allow me to hold a Roth IRA. If I should consider an IRA, I would like to just roll my stocks into the account without having to sell them first. Is this possible? I am mainly saving the money to invest in my first home. Can I buy my house through my IRA?

If your still with me, should I just go see an investment advisor?

Thanks for the help.

[Guest mjb]

1. you cannot rollover the stocks in your portfolio to an IRA ( nor would you want to because all IRA assets are taxed as ordinary income instead of captial gains).

2. Using an IRA to purchase the home you live in is a prohibited transaction which wil result in taxation of the IRA.

3. Maximum contribution to an IRA is 4,000.

4. download a copy of IRS publicaton 590 avialable free at WWW.irs.gov. (its about 110 pages) which will provide you with information on IRAs.

[txdd]

High income does not keep you from HOLDING a Roth IRA. It just limits new contributions in those years with high income. Existing Roth IRA's go on unaffected regardless of income. Higher future income makes Roth IRA's even more valuable in most cases.

Also, the $95K MAGI limit where the max Roth contribution for a single taxpayer BEGINS to go away is an old number which is now indexed for inflation. It's $99K in 2007.

[Guest mjb]

High income does not keep you from HOLDING a Roth IRA. It just limits new contributions in those years with high income. Existing Roth IRA's go on unaffected regardless of income. Higher future income makes Roth IRA's even more valuable in most cases.

Also, the $95K MAGI limit where the max Roth contribution for a single taxpayer BEGINS to go away is an old number which is now indexed for inflation. It's $99K in 2007.

You are assuming that in the future Congress will not tax distribuions of Roth accounts in excess of the after tax contributions and mandate distributions at 70 1/2 just as it decided to tax SS benefits in 1983. There is no consitutional prohibition against taxing the earnings on Roth IRAs at a future date.

[John G]

> While your IRA can't own your house, you can tap into Roth funds for a first time home purchase.

> As said above, you don't transfer stocks into an IRA or ROTH, contributions are made in cash. The only time any transfers of holdings occurs is when you do a conversion or rollover.

> Yes, do open a Roth. Who knows what your income will be in future years or what income thresholds will be set by Congress. You qualify each year and once an IRA/Roth is correctly funded, it does not matter if you subsequently do not qualify. Example, my wife started as a school teacher late in life and worked for a few years before going back for he PhD. She funded her 403b (another tax shelter like IRAs and 401Ks) at a modest level. After five years of contributing, then five years of not contributing.... that account is now on the sunny side of 70K, much to our surprise. That will grow to be more than a two full years of retirement income by the time we tap it. To bad it isn't a Roth!

> Roth rule changes. There have already been many Roth rule changes and many more to come, especially in terms of income thresholds, max contributions, and conversion rules. However, I doubt that Congress will reneg on the tax status of distributions. There are literally millions and millions of Roth account holders. They would form a very powerful voting block. My accountant has a unique view on this - he thinks that the courts might overrule a Congressional change because of the established basis double taxation. While there are some precendents with regard to social security and the "notch" years for SS, I don't see them as strong precedents for Roths. I also note that the trend since 1998 is to liberalize or relax the constraints on Roths.

> Investment advisor? Maybe. I can't give a big positive endorsement to investment advisors for two reasons: (1) there are way too many poorly trained investment advisors or folks that only know one niche like mutual funds or insurance, and (2) too many have their hand out and steer you toward products that give them commissions... a real conflict of interest. You might learn a lot by dedicating 2 hours a month to reading Kiplinger Fiancial, Money or books from your library. Sometimes you can find someone at work that knows this stuff, or some of this stuff and can mentor you... although that doesn't always work out because of limited expertise. I am a big fan of self help programs - in the internet/google era you can learn a huge amount of info in an hour. Just be sure to use multiple sources and consider the biases of the info provider.

> The max contribution for an IRA/Roth will be moving up. You need to check each year both about the max amount and your income eligibility. The IRS Publication 590 is a good source along with custodians.

[Guest mjb]

Could you ask your accountant to explain double taxation of earnings that have not been taxed? Second when was the last time a court over ruled a tax law that taxed income? The courts take a hands off attitude toward taxabion because judges believe that tax laws should be left to the political process.

Your analogy of milions of angry roth account holders isnt valid because congress could elect to only tax the roth income of taxpayers with an AGI over a certain limit such as 80,000 as was done with SS benefits when only SS beneficaries with taxable income 25,000/32,000 if married, had 50% of their benefits subject to taxation. No one can guarantee that Congress would not tax Roth earnings in the future in a similar manner.

Trends to liberalize Roth IRAs can change with the political winds remember the universal IRA that was encated 1981 and repealed in 1986.

[John G]

MJB, I guess we will continue to disagree on this issue.

I think that future changes if detrimental, existing accounts are likely to be grandfather. While Congress can act to change anything, a direct reneg of the Roth terms would create a firestorm and righteous claims of something akin to bait and switch. The number of households participating in Roths continues to grow and provides a very large block of voters. If they had ended the program after a few years, then over time the number of effected parties would have declined in significance. The opposite seems to be happening.

[Guest mjb]

John: I enjoy your pollyanna belief that congress will grandfather Roth IRA tax benefits which do not have any protection under the US Constitution. But you overlook the obvious that Congress could tax Roth earnings as part of an overall tax reduction plan as was done in 1986 when tax rates were reduced to 15 and 28% (from max rate of 70%) in return for elimination of unlimited IRA deductions, reduction in 401k deductible contributions from 30,000 to 7500, elimination of personal interest deductions, elimination of the use of passive losses against ordinary income and elimination of favorable rates for capital gains. No reason why this cannot happen to tax earnings on Roth IRAs. Such a change would benefit holders of taxable IRAs over roth IRAs.

[Bird]

mjb, are you predicting that Congress will tax Roth earnings at some future date or are you just positing that it's a possibility? Of course it's a possibility, but I agree with John G that it's remote at best - certainly not enough to change someone's actions today. What's your point?

[Guest mjb]

Prior to 1983 no one took taxation of SS benefits seriously. I am not saying taxation of Roth earnings are on anyones agenda at this time but that there is no guarantee that in 20-30 yrs when owners of Roth IRAs retire that the earnings on a Roth will not be taxed. Its part of the equation of whether a taxpayer wants to elect a roth or a traditonal IRA. Roths start off with the disadvantage of paying taxes up front which results in the loss of investment income om the future value of the taxes paid. For example if a 25% bracket taxpayer contributes 4,000 to an Roth he loses 1,000 in discretionary income at 8% that will result in a loss of 15,968 in investment income compounded over 36 yrs. Taxable IRAs dont have this disadvantage. Taxpayers in the 15% bracket will not have too much to worry about but anyone in a higher bracket or with AGI over 100k who will make a conversion in 2010 should consider the question.

[Guest augustineregal@yahoo.com]

Prior to 1983 no one took taxation of SS benefits seriously. I am not saying taxation of Roth earnings are on anyones agenda at this time but that there is no guarantee that in 20-30 yrs when owners of Roth IRAs retire that the earnings on a Roth will not be taxed.

Drawing conclusions about what might happen to Roth IRAs based on what happened with social security might be an apples to oranges comparison. Social security has always been a "pay as you go" program. Those paying into it now aren't building a nest egg for themselves--rather, they're paying for current benefit recipients. So those receiving benefits can't claim they're being taxed twice, because they didn't contribute toward their own benefits. In a Roth IRA, however, those who contribute are paying towards their own nest egg, not someone else's. They've already paid taxes on the money they've contributed. Further, Roth IRAs are explicitly described as something in which you pay taxes now so you won't have to pay later. Social security has no analogous claim.

I agree that trying to tax Roth distributions sometime in the future would cause a firestorm of protest. Retirees who spent their working lives paying into a plan that specifically promised tax free distributions will be a formidable and highly motivated voting block. It's also possible the investment industry might see this as something that makes its clients unhappy, and thus will throw its considerable weight (and wallet) into the fray.

Taxing Roth distributions would be a political third rail: touch it, you die.

Regal 56

[jpod]

I have to agree with mjb on this one; Roth IRA and 401k accounts will be a very ripe target some day. Will they be taxed? Who knows, but it certainly is possible. Generally speaking, I don't think one should ever look a gift horse (in this case, a current tax deduction) in the mouth. Sure, the Roth is a better deal for many people, but only if you assume that the earnings won't be taxed.