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Time To Roth Some Beaten Down Securities?



January 16, 2008 – Comments (2)

The light of my life came up with an interesting idea yesterday. If you have some really beaten down stocks that you are planning on holding, now might be a great time to transfer them to your Roth account.

The rational is that the current market value counts as the value of the transfer. But when the stock rebounds it does so in your Roth account and the rebound won't be taxed. Ever.

If you decide to do this, observe the contribution limits on your Roth account and take your overall tax picture into the decision. We are doing this on some steam rolled retailers that are good long term holdings.

If you do this from an IRA account, you will need to pay the taxes and penalty on the transfer. But it still might be worthwhile to do this if the stock has been flattened enough. You will only pay taxes and penalty on the current market value, not what you paid for the stocks or what they might be worth later.

Chris - not a tax advisor, seek  appropriate counsel before you make any moves

2 Comments – Post Your Own

#1) On January 16, 2008 at 10:15 AM, wolfhounds (41.15) wrote:

I am a CPA and can  tell you that your idea has some merit, but only for certain taxpayers. If, like myself, you are retired and in a lower tax bracket, and WON'T BE SUBJECT TO THE 10 % EARLY WITHDRAWAL PENALTY, then it makes sense. I've been doing this myself the last 2 years since I took early retirement. Otherwise, the tax and penalty could be as high as 45 %. That's a huge appreciation to expect for the advantage of the transfer.

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#2) On January 16, 2008 at 11:01 AM, charlesblazer (30.31) wrote:

wolfhounds, could you clarify that?  Which early withdrawal penalty are you talking about?  I thought that if you transfer from a regular (beaten down) taxable account to a Roth IRA, and do not withdraw the money until you are 59 1/2, that there would be no penalty.  Are you assuming that one would withdraw from the Roth IRA before 59 1/2?

In fact, I thought there was yet another upside, in that you could use the losses on your beaten down taxable investments (that you cashed out) to offset gains on other taxable investments in the same year.

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