Sell Brokerage VTI to Invest in Roth?

[dudeswithcars]

Hi all, I've got a lot of VTI in a traditional brokerage account. I haven't maxed out my ROTH IRA this year and thinking of selling off some brokerage VTI to invest in my ROTH. Is this a good idea or bad? I'm thinking that I will be taxed the capital gains or its just not wise to sell my VTI. Also, whats the difference between selling old shares of VTI (say bought at 150) versus new bought at 200? I know the difference is the price but is better to sell older shares that are more valuable or newer ones that are less so? Any advice on that? Thanks all!

[MDM]

First, ensure that your cost basis option in the brokerage is "specified shares" (or similar wording).  Then sell the ones with the highest cost long term gains because you will incur the lowest tax to do so.

[SeattleCPA]

What do you want to move money into a Roth account?

It doesn't necessarily save you tax. Also the benefit is probably very slight if you're talking about $7K.

Taxable accounts holding VTI are extremely tax efficient. Also probably the most flexible account you have?

[dudeswithcars]

I'm in a lower tax bracket than I will be years from now. It makes more sense for us to move the money into Roth since it will be taxed at a lower rate on the way into the Roth is what I'm thinking?

What's confusing for me is getting taxed for the income I initially made to put it in there from my job, then, if I sell from my brokerage it gets taxed again to put it into Roth...seems like a bad idea to me right now...

[reeshau]

What's confusing for me is getting taxed for the income I initially made to put it in there from my job, then, if I sell from my brokerage it gets taxed again to put it into Roth...seems like a bad idea to me right now...

Only your gains are taxed.  The money you bought it with is your cost basis.  It is subtracted from the total proceeds to calculate the gain.

You say you are in a low bracket.  If you make less than $47k (single, or $94k filing jointly) some or all of your gains may be taxed at zero, anyway.  (Your earned income counts in this limit, too.  If you earned $46k, only $1k would be 0%.  But the rest would be just 15%.)

https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

I am having quite a good time, living the years prior to 59 1/2 paying 0% tax, because my other income is essentially $0.  (Less than the standard deduction)  It is essentially the same math as the Roth, if I stay below those limits.

[secondcor521]

What's confusing for me is getting taxed for the income I initially made to put it in there from my job, then, if I sell from my brokerage it gets taxed again to put it into Roth...seems like a bad idea to me right now...

You're only taxed on the gain related to the sale, not the entire amount.

So if you want to put $7K into a Roth, and you have $7K worth of VTI that you paid $6K for, you'll only pay tax on the $1K of gain.  And if it's VTI that you've held longer than one year, you'll only pay LTCG rates on that $1K, which will in most cases be either 0% or 15%.

[dudeswithcars]

So, what would everyone say is the conclusion? Sell VTI to put into Roth?

[MDM]

So, what would everyone say is the conclusion? Sell VTI to put into Roth?

Not enough specific information given, e.g., current and expect retirement marginal tax rates, basis fraction on shares that will be sold to pay tax, etc.

See rows 150-166 on the 'Misc. calcs' tab of the case study spreadsheet.  One example result is shown below.  Using your actual numbers, what do you get?

Extra fee in tax-advantaged	0.0%
Return from dividends in taxable	2.0%
Return from growth in taxable	4.0%
Total return in tax advantaged	6.0%
Tax rate on dividends	15.0%
Taxable return, including dividend tax	5.70%
Tax rate on capital gains at withdrawal	15.0%
Effective cap. gain tax rate	10.526%
Number of years invested	30
Ratio for equal outcomes	.827
Current ordinary income marginal tax rate	22.0%
Current capital gain tax rate	15.0%
Basis fraction of funds used to pay tax	50.0%
Marginal tax rate of conversion	23.784%
Withdrawal breakeven rate	19.671%	<- prefer Roth if the marginal withdrawal rate will be greater than this.