Archives for May 2015

A reader writes in, asking:

“I recently came into some money, about $40,000 of assorted stocks. Is there a way to get this into one of my retirement accounts? I gather that I am not allowed to roll it into my 401K or IRAs, is that correct?”

It is correct that you cannot roll money from a regular taxable brokerage account into a retirement account. (If you could, there would be no point in having contribution limits, because you could save as much as you wanted in a taxable brokerage account and just roll it over.)

However, there may be a way to ultimately get the money into a retirement account. Specifically, if you are not maxing out your retirement account contributions at the moment, you could use the recently acquired assets to pay the bills while bumping up your retirement account contributions to the max.

For example, if you have a 401(k) with a contribution limit of $18,000 and a Roth IRA with a contribution limit of $5,500 (for a total of $23,500), yet you’re only making contributions of $15,500 per year, you have an additional $8,000 of contribution space that’s currently going unused. So you could bump your contributions up to the max and use the taxable investments to help pay the bills (to the tune of $8,000 per year). After 5 years, the $40,000 sum would effectively have been transferred into your retirement accounts.

This tends to work well with recently acquired sums of cash (e.g., from the sale of a business or from downsizing living quarters). It also works well for recently-inherited assets, because when you inherit something you (in most cases) get a step-up in cost basis. That is, your cost basis will usually be equal to the fair market value of the asset on the date of the original owner’s death, meaning that there would be little-to-no capital gains tax to pay if you sell the assets (which you would be doing in order to free up cash to max out your retirement account contributions).

This strategy does not work quite as well for investments that you’ve held for a long time, and which have large unrealized capital gains — because there could be a significant tax cost to selling the assets in order to free up cash to make additional retirement account contributions. In such cases, whether it makes sense to do it depends on several factors, such as:

• How much tax you’d have to pay if you liquidated the assets now;
• How much tax you would have to pay if you waited and did it later (For example, if you expect your income to decline in the near future, it may make sense to wait if doing so will allow you to pay a lower rate of tax on the capital gains.);
• How long you expect to hold the assets (the longer, the greater the tax cost of keeping them in a taxable account and paying taxes on interest/dividends along the way); and
• Whether you expect your heirs to be inheriting the assets in the not-entirely-distant future (if so, it may make sense to simply hold the assets in the taxable account and let your heirs inherit them so they get a step-up in cost basis).