Author Topic: Moving taxable assets to a Roth IRA  (Read 2170 times)

TheGadfly

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Moving taxable assets to a Roth IRA
« on: January 02, 2014, 01:37:37 PM »

I have about $11k in a taxable investment account (a mix of relatively high-risk mutual funds).  I was already planning to sell most or all of these assets and invest in low-cost ETFs, Vanguard accounts, index funds etc. since the management fees on my current holdings are between 1-2%. 

This money is primarily intended as a down payment on a house (in 5-7 years).  I just learned this morning that it is possible to take money out of a Roth IRA for first-time home buyer expenses without paying taxes or penalties. 

Is it sensible to move some or all of these assets to a Roth IRA so that I can use future earnings toward a house?

I'm aware of a few caveats:

1) I can only move over $5000 per year into a Roth
2) I should be careful when selling my mutual funds because my capital gains will count as taxable income (to date, the account has appreciated about $3000).  I couldn't sell anything in 2013, for example, without putting myself in the 25% tax bracket.
3) I can only withdraw money from my Roth after my contributions have sat for 5 years.

Is there anything else I should consider before making this move?  Has anyone else done this in the past?  Are my assumptions correct?

OperaAdam

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Re: Moving taxable assets to a Roth IRA
« Reply #1 on: January 02, 2014, 02:20:49 PM »
A roth IRA is not necessarily a bad place for the money, but there are more rules to the distributions than you listed. First, you can withdraw money that you put in to a roth as a contribution at any time without penalty. You run into weird rules when taking distributions of earnings early though.

Also, the qualified distribution exception for a first home are capped at $10,000, so be aware of that.

If you want to go that route, you might be able to save yourself a little bit of money on taxes in the next few years, but it's not a strategy that you could use for the entire down payment, (unless it's a small house or a cheap area). Also remember that you can still contribute to your Roth IRA for 2013 up until you file your taxes.

Before you go this route, read up a little more on Roth IRAs just to be sure it's what you want to do and that you've got the math all worked out.

Check out http://www.investopedia.com/articles/retirement/03/030403.asp for a little bit about it, or if you're ambitious and can stay awake reading the tax code, http://www.irs.gov/publications/p590/index.html.

TheGadfly

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Re: Moving taxable assets to a Roth IRA
« Reply #2 on: January 06, 2014, 12:46:46 PM »
Thanks!

That is good information.  I did read about the $10k cap on distributions for a first home just after posting, which is somewhat disappointing; however, this still seems like an attractive option.

My wife plans to attend graduate school full time in Fall 2014 or 2015.  Since she won't be working, our combined taxable income will be well within the 15% tax bracket (we will be back in the 25% bracket once she starts working again).

My thought is to move everything into a Roth at that time (assuming those in the 15% bracket will still owe 0% in capital gains taxes by that time).  While a $10k distribution would only make up a fraction of my expected down payment on a house, this might be a good opportunity to avoid a tax bite in general, right? 

I also read that qualified distributions include expenses for higher education (my wife is hoping to avoid a loan but at least one might be inevitable).  Is this also a viable strategy for knocking out a student loan?