Hi MMM community,
My husband was gifted a large amount of stock ~10 years ago that has sat around and lost ~2/3 of its value (however, he is adamant on keeping it). It is now valued at $35k. I recently discovered the wonder of Roths, and decided that instead of transferring our small (but growing) stashe of $10k into our newly minted Roth accounts, I would transfer this stock into his account. I learned yesterday that you can only put cash directly into Roths, and not stocks (I guess that makes sense).
The plan is:
-Transfer stock into our Vanguard account
-Sell ~$11k of it (under the $14k 'gift tax' limit)
-Transfer the cash to his Roth
-Wait 30 days to avoid a "wash"
-Re-buy the stock and keep the hubby happy
Does this work? Or are we tripping some regulatory wire? I only vaguely understand "washing" stocks, and I just don't want to hit any other regulatory roadblock here.
FYI--our yearly income is ~$44k, so I think we're under the capital gains tax rates, the Roth limit, and I think we will qualify for a savings credit at this level.
Please understand I am not an expert. Based on your plan, and the responses you have received so far, I think you should hold off a bit until there is more information available. You have waited 10 years so far, a little more wait will not hurt. Maybe vanguard can direct you through it at no cost to you?
I believe you are unnecessarily treating this as 1 big action, instead of several independent ones. They are actually independent.
I am assuming this stock is in a non-qualified account (i.e. not a retirement account) because if it was in a retirement account, you would have needed to be taking distributions annually since the year of death.
1. The cost basis for the stock should be set at the day of death, NOT the date of purchase. You should do NOTHING until you have a reliable cost basis. Everything else is dependent on that.
2. Any taxes on the gift would have been paid by the estate, and only if the total of the estate was above the estate tax exclusion. The year of death is very important, especially the past 10-15 years, because the exemption went from about $1 million all the way up to 0 tax (100% exclusion in 2010) for 1 year, then back down to exclude about $5 million, increasing annually from there. This would have been very important for the executor, but of little use for you. Once the stock is transferred to you, the only important information for you is the cost basis.
3. The sale of the stock will have no gift rule associated with it. You are free to sell it all, or keep it forever. No gift association at all.
4. There may or may not be taxes owed on the sale of the stock. If you have a gain, the tax owed is based on your income, currently 0% tax if you are in the 15% tax bracket and maxing out at a 20% tax if you are in the 39.6% tax bracket. If there is a loss, you may be able to offset other income to a degree and then carryover the remainder. It is here that we will need more info from you, or you need to consult an accountant.
5. Investing in a ROTH is a great idea in general. Whether it is best for you depends on your current and expected income. One thing I see is that if you can get your AGI to <$37,000, you will get a savers credit of 50% of your contribution. Roth IRA contributions do not lower your AGI, but contributions to a 401(k) or traditional IRA will. You might be better off contributing to one of those instead of a ROTH.
6. The wash sale rule would definitely apply in your example. It should not be an issue for you. If you are selling, then you should be buying the market, not individual stocks. Yes to waiting 30 days if you choose to do it anyway.
Whether or not you sell the stock really has nothing to do with contributions to retirement accounts, unless you need THAT money in order to contribute anything.
As far as selling the stock, treat it as a separate action, because it is. It most likely has sentimental value. Who else would leave him money other than someone he loves and that loves him. That has value. It can also impact financial decisions by making decisions using something other than what might be best for your bottom line. From a purely financial decision, you and your spouse are not good enough to choose the right stock. 80% of those that are trained to do it can not. Someone with no training has little chance to beat the market. You should buy the market instead. That said, he might still want to keep it anyway.
I was left some stock as well, and I held on to it. Still have it. How has it done? I really have no clue. It has split, reverse split and spun another company all while both new stocks were giving me dividends the entire time. BUT, I did not count 1 single dollar of it into my financial plan. It is just there. Every time I look at it, I am reminded of my grandfather. I will probable never sell it since I do not need any of it to remain FIRE. If I wanted to put it into my financial plan, you bet I would have sold and bought the market. Someday it might go toward philanthropic endeavors.
I also have some stock I bought thinking I knew what I was doing. I didn't even know what they DID, still don't. It is worth about 3% of what I paid for it. I will keep that forever as well, just in case I think I am getting smart.
Another thing to thing about: There is great talk about tax changes, and anytime there is change, there will be winners and losers. Often there is a window whereby you can use the old or new rules within some window, so why not wait until you know what the new rules will be before deciding.
My advice: decide to sell 95% of it to buy the market, and then do so using the best tax strategy for you based on above.
Plus your husband can think of that person during every quarterly review, since he still owns some of it :)
What is the stock?
Keep us posted and good luck