selling stock and affects on AGI

[Dred Pirate]

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So I have a first world problem and want to see if any of the smart financial experts can help me.

I have about 100k in a single company stock and I prefer to have the money in mutual funds. Cost basis is around 50k - so essentially for every 2 dollars I sell, I know I will owe capital gains taxes on $1 (15%). That I don't have a problem with, I know I will pay it eventually.

My situation is that currently I max out Roth IRA's for my wife and I to the tune of 11k a year. Our adjusted gross income (AGI) - or actually Modified AGI - (but for us they are the same) is ~172k - the most you can make and contribute the max to a Roth IRA is 186k this year. If I sell the full amount I won't be able to contribute to a Roth this year.

The way around this that I can think of is to sell ~25k each year (bumping up my AGI by 12.5k) and then be able to still contribute to the Roth - and it will take 4 years to sell all of the stock.

Other options? I guess I could do a back door Roth one year to get around income limits.

 

[josh6718]

So I have a first world problem and want to see if any of the smart financial experts can help me.

I have about 100k in a single company stock and I prefer to have the money in mutual funds. Cost basis is around 50k - so essentially for every 2 dollars I sell, I know I will owe capital gains taxes on $1 (15%). That I don't have a problem with, I know I will pay it eventually.

My situation is that currently I max out Roth IRA's for my wife and I to the tune of 11k a year. Our adjusted gross income (AGI) - or actually Modified AGI - (but for us they are the same) is ~172k - the most you can make and contribute the max to a Roth IRA is 186k this year. If I sell the full amount I won't be able to contribute to a Roth this year.

The way around this that I can think of is to sell ~25k each year (bumping up my AGI by 12.5k) and then be able to still contribute to the Roth - and it will take 4 years to sell all of the stock.

Other options? I guess I could do a back door Roth one year to get around income limits.

Do you have an HSA set up?

 

[Dred Pirate]

Do you have an HSA set up?

yup- max it out (although not sure how that relates to this question?)

 

[josh6718]

yup- max it out (although not sure how that relates to this question?)

Maybe I'm not understanding, is your goal to to reduce your AGI to still contribute to your Roth?

 

[Dred Pirate]

Maybe I'm not understanding, is your goal to to reduce your AGI to still contribute to your Roth?

ahhh! gotcha - now I see the connection - ya - either lower the AGI, or someway of selling the stock and moving to a mutual fund without triggering capital gains income (delaying having to claim the income)

 

[Momus]

You can sell all your stock, pay 15% long term capital gain (if you have it more than 1 yr). Do backdoor Roth for you and your wide (there is no AGI limit). Don't worry about going over the limit when you are doing backdoor. Just make sure you don't have IRA accounts.

Steps:
Backdoor Roth IRA - Bogleheads

 

[Dred Pirate]

You can sell all your stock, pay 15% long term capital gain (if you have it more than 1 yr). Do backdoor Roth for you and your wide (there is no AGI limit). Don't worry about going over the limit when you are doing backdoor. Just make sure you don't have IRA accounts.

Steps:
Backdoor Roth IRA - Bogleheads

ya - I was trying to avoid this (then having two other small accounts to keep track off - or can I merge that IRA with my current Roth?) We both do have other traditional rollever IRA accounts thou - assuming that complicates things based on your last sentecne

 

[pezdispenser]

ya - I was trying to avoid this (then having two other small accounts to keep track off - or can I merge that IRA with my current Roth?) We both do have other traditional rollever IRA accounts thou - assuming that complicates things based on your last sentecne

Yeah I posted this on someone else's question about back door Roths so will copy it here:

If you have pre-tax money in traditional IRAs, you'll have to pay taxes in proportion to it when you do a back door Roth. e.g. If you have $50k pre-tax in the traditional IRA and make a $5,500 contribution with the intention to convert that to a back door Roth, you'll have to pay taxes on $50,000 / $55,500 x $5,500 = $4954.95 of the conversion.

You can avoid this by rolling your traditional IRAs into your current employer's 401k if they let you.

 

[josh6718]

I'm assuming you also maxed out your 401k if you have one? What about any capital losses on stocks you might claim? Probably won't be able to deduct much, but you could use cash from that sale to invest then invest/transfer into a mutual fund?

 

[gwarm01]

Make a sizable donation to the Human Fund.

 

[Momus]

ya - I was trying to avoid this (then having two other small accounts to keep track off - or can I merge that IRA with my current Roth?) We both do have other traditional rollever IRA accounts thou - assuming that complicates things based on your last sentecne

You can't merge it but you can roll over your IRA to your current employer 401k (hopefully you have a decent expense ratio <0.5% in your 401k). Then, do backdoor Roth. This way you won't have any taxable event.

 

[Dred Pirate]

I'm assuming you also maxed out your 401k if you have one? What about any capital losses on stocks you might claim? Probably won't be able to deduct much, but you could use cash from that sale to invest then invest/transfer into a mutual fund?

maxed out 403b and roth, I don't any other individual stocks

 

[Dred Pirate]

You can't merge it but you can roll over your IRA to your current employer 401k (hopefully you have a decent expense ratio <0.5% in your 401k). Then, do backdoor Roth. This way you won't have any taxable event.

I could take roll over IRA and merge with my companies 403b (good expense ration), then do a backdoor roth, but then I still have three accounts. 403b, roth ira, then the small tiny roll over roth. I think I will just sell 25% each year until it is gone

 

[Momus]

I could take roll over IRA and merge with my companies 403b (good expense ration), then do a backdoor roth, but then I still have three accounts. 403b, roth ira, then the small tiny roll over roth. I think I will just sell 25% each year until it is gone

That's pretty much what everyone who is doing backdoor roth IRA has. 1 ROTH account, 1 401k/403b. If you have a spouse x 2 = 4 accounts total. I don't know how much simpler you want it to be.

Tiny Roth can go to the other Roth account. Keep it simple. Transferring between custodian as long as you keep the same type of account doesn't incur tax liability.

 

[pezdispenser]

I could take roll over IRA and merge with my companies 403b (good expense ration), then do a backdoor roth, but then I still have three accounts. 403b, roth ira, then the small tiny roll over roth. I think I will just sell 25% each year until it is gone

Not sure what you're worried about here. Roll your traditional IRA into your 403b. Then open a new traditional IRA at the same company as your Roth IRA. Make a non-deductible (after-tax) contribution of $5,500 to it, and just hold it in a money market fund. The next day, convert that entire traditional IRA to combine it with your existing Roth IRA. Then you can invest the money in whatever you want, tax free. I would suggest that you buy your stocks in your Roth IRA so that you won't have this 'tax bomb' issue in the future.

 

[Whereismynorco]

You can sell all your stock, pay 15% long term capital gain (if you have it more than 1 yr). Do backdoor Roth for you and your wide (there is no AGI limit). Don't worry about going over the limit when you are doing backdoor. Just make sure you don't have IRA accounts.

Steps:
Backdoor Roth IRA - Bogleheads

"Don't worry about going over the limit when you are doing backdoor" What do you mean here?


Sent from my SM-G930V using SDN mobile

 

[Momus]

"Don't worry about going over the limit when you are doing backdoor" What do you mean here?


Sent from my SM-G930V using SDN mobile

Making more income or selling stocks...

 

[Dred Pirate]

The next day, convert that entire traditional IRA to combine it with your existing Roth IRA. Then you can invest the money in whatever you want, tax free.

This was the part I didn't realize I could do, I thought I would have to leave it in its own account as a separate Roth, I didn't realize you could combine it with an existing roth

 

[Modest_anteater]

So I have a first world problem and want to see if any of the smart financial experts can help me.

I have about 100k in a single company stock and I prefer to have the money in mutual funds. Cost basis is around 50k - so essentially for every 2 dollars I sell, I know I will owe capital gains taxes on $1 (15%). That I don't have a problem with, I know I will pay it eventually.

My situation is that currently I max out Roth IRA's for my wife and I to the tune of 11k a year. Our adjusted gross income (AGI) - or actually Modified AGI - (but for us they are the same) is ~172k - the most you can make and contribute the max to a Roth IRA is 186k this year. If I sell the full amount I won't be able to contribute to a Roth this year.

The way around this that I can think of is to sell ~25k each year (bumping up my AGI by 12.5k) and then be able to still contribute to the Roth - and it will take 4 years to sell all of the stock.

Other options? I guess I could do a back door Roth one year to get around income limits.

You want to hold the stock position for at least 12 months for it to qualify as Long Term Capital Gains (a much lower rate). If you sell shorter than that time peroid you will have the Short Term Capital Gains rate which is a much much higher tax rate

 

[Dred Pirate]

ya that isn't a problem (these are stocks bought 15 years ago)

 

[Amicable Angora]

This was the part I didn't realize I could do, I thought I would have to leave it in its own account as a separate Roth, I didn't realize you could combine it with an existing roth

Pezdispenser is a beast.

 

[PharmDBro2017]

Pezdispenser is a beast.

His post above: mind=blown

 

[Amicable Angora]

Not sure what you're worried about here. Roll your traditional IRA into your 403b. Then open a new traditional IRA at the same company as your Roth IRA. Make a non-deductible (after-tax) contribution of $5,500 to it, and just hold it in a money market fund. The next day, convert that entire traditional IRA to combine it with your existing Roth IRA. Then you can invest the money in whatever you want, tax free. I would suggest that you buy your stocks in your Roth IRA so that you won't have this 'tax bomb' issue in the future.

Have a question for you. If he did not roll over his existing traditional IRA account, and left it as is, is it affected by the following part, where he opens a new traditional IRA at the same company as his ROTH IRA and converts? Is it affected even if he does not attempt to transfer the existing account?

 

[pezdispenser]

Have a question for you. If he did not roll over his existing traditional IRA account, and left it as is, is it affected by the following part, where he opens a new traditional IRA at the same company as his ROTH IRA and converts? Is it affected even if he does not attempt to transfer the existing account?

To do the back door Roth procedure properly you shouldn't have any pre-tax money in any existing traditional IRAs. That's why you have to transfer them to a 401k or 403b. Otherwise, if you go through the calcs on IRS Form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf they ask on line 6 what is the value of all your traditional, SEP and SIMPLE IRAs at the end of the year, no matter where they are held or if they are separate accounts. Then the amount you convert to a Roth has to come proportionately from your pre-tax traditional IRAs (which means you'll have to pay taxes on this amount) and from the non-deductible (after-tax) contribution you just made. You can't just choose to convert that after-tax contribution.

Here is the same example from my earlier post:
If you have $50k pre-tax in the traditional IRA and make a $5,500 contribution with the intention to convert that to a back door Roth, you'll have to pay taxes on $50,000 / $55,500 x $5,500 = $4954.95 of the conversion.

 

[Amicable Angora]

To do the back door Roth procedure properly you shouldn't have any pre-tax money in any existing traditional IRAs. That's why you have to transfer them to a 401k or 403b. Otherwise, if you go through the calcs on IRS Form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf they ask on line 6 what is the value of all your traditional, SEP and SIMPLE IRAs at the end of the year, no matter where they are held or if they are separate accounts. Then the amount you convert to a Roth has to come proportionately from your pre-tax traditional IRAs (which means you'll have to pay taxes on this amount) and from the non-deductible (after-tax) contribution you just made. You can't just choose to convert that after-tax contribution.

Here is the same example from my earlier post:
If you have $50k pre-tax in the traditional IRA and make a $5,500 contribution with the intention to convert that to a back door Roth, you'll have to pay taxes on $50,000 / $55,500 x $5,500 = $4954.95 of the conversion.

Thank you very much for another excellent post.

 

[Whereismynorco]

Sorry to hijeck the thread, but I have que. I just rolled over my traditional IRA to my 401k, but I didn't realize that I was rolling over non deductible ira to my 401k. What problems/charges am I facing other than paying taxes twice???

 

[pezdispenser]

Sorry to hijeck the thread, but I have que. I just rolled over my traditional IRA to my 401k, but I didn't realize that I was rolling over non deductible ira to my 401k. What problems/charges am I facing other than paying taxes twice???

Uh oh, that's a problem. Only the IRS knows that the traditional IRA was nondeductible after-tax money because you declare it only to them on Form 8606. Everyone else including the traditional IRA holder and your 401k assumes that it was deductible pre-tax money, and thus it will be taxable on withdrawal. I also don't think that you're even allowed to roll nondeductible money into a 401k as they didn't ask you if it was pre-tax or after-tax right? I think you should try to reverse the transaction, then roll the nondeductible IRA to a Roth.

 

[iggles]

Uh oh, that's a problem. Only the IRS knows that the traditional IRA was nondeductible after-tax money because you declare it only to them on Form 8606. Everyone else including the traditional IRA holder and your 401k assumes that it was deductible pre-tax money, and thus it will be taxable on withdrawal. I also don't think that you're even allowed to roll nondeductible money into a 401k as they didn't ask you if it was pre-tax or after-tax right? I think you should try to reverse the transaction, then roll the nondeductible IRA to a Roth.

I have a very rudimentary understanding of retirement/investment accounts and their tax implications. Could you link me to some resources or tutorials that will give me a better understanding?

 

[pezdispenser]

I have a very rudimentary understanding of retirement/investment accounts and their tax implications. Could you link me to some resources or tutorials that will give me a better understanding?

I recommend the e-book "If You Can" by William Bernstein to put you on the right track for investing, and things to watch out for.
https://www.etf.com/docs/IfYouCan.pdf

And here is a summary of retirement accounts that I wrote in another post:

- 401k. $18k max. Contributions not taxed, but you will pay taxes on withdrawals. Usually get a match from employer of $1 for $1, or $0.50 for $1 on up to 3-6% of your salary that you contribute.

- Deductible Traditional IRA. If you are eligible for a 401k there is an income phaseout for singles $62-72k, married $99-119k, so most pharmacists are not eligible. Anyway, the taxation is the same as a 401k: contributions not taxed, but you will pay taxes on withdrawals.

- Non-deductible Traditional IRA. No income limit. No tax deduction, and earnings (not the original contribution) will be taxable on withdrawal. These are really only used as part of the backdoor Roth process to get around the income limit of the Roth, because you can convert to a Roth tax free.

- Roth IRA. Income phaseout for singles $118-133k, married $186-196k, but if you are over you can do the backdoor Roth process for the same result. You are contributing after-tax money so there is no tax deduction, but all growth and withdrawals are tax free. Basically the opposite taxation to a 401k. The 401k usually works out better so max it out before you do a Roth IRA.

You can only contribute $5,500/yr total across any type of IRA. You choose where to open the account, and choose what to invest in. You can even have a brokerage account to invest in individual stocks.

 

[iggles]

I'm

I recommend the e-book "If You Can" by William Bernstein to put you on the right track for investing, and things to watch out for.


And here is a summary of retirement accounts that I wrote in another post:

- 401k. $18k max. Contributions not taxed, but you will pay taxes on withdrawals. Usually get a match from employer of $1 for $1, or $0.50 for $1 on up to 3-6% of your salary that you contribute.

- Deductible Traditional IRA. If you are eligible for a 401k there is an income phaseout for singles $62-72k, married $99-119k, so most pharmacists are not eligible. Anyway, the taxation is the same as a 401k: contributions not taxed, but you will pay taxes on withdrawals.

- Non-deductible Traditional IRA. No income limit. No tax deduction, and earnings (not the original contribution) will be taxable on withdrawal. These are really only used as part of the backdoor Roth process to get around the income limit of the Roth, because you can convert to a Roth tax free.

- Roth IRA. Income phaseout for singles $118-133k, married $186-196k, but if you are over you can do the backdoor Roth process for the same result. You are contributing after-tax money so there is no tax deduction, but all growth and withdrawals are tax free. Basically the opposite taxation to a 401k. The 401k usually works out better so max it out before you do a Roth IRA.

You can only contribute $5,500/yr total across any type of IRA. You choose where to open the account, and choose what to invest in. You can even have a brokerage account to invest in individual stocks.

In theory could I contribute enough to my 401k to lower my MAGI enough to make the cutoff for a traditional deductible IRA?

 

[Momus]

I'm


In theory could I contribute enough to my 401k to lower my MAGI enough to make the cutoff for a traditional deductible IRA?

You can't get another deduction on ira contribution magi >72k for filing as single . Every rph will make more than that.

 

[pezdispenser]

I'm


In theory could I contribute enough to my 401k to lower my MAGI enough to make the cutoff for a traditional deductible IRA?

I suppose it's possible, if your spouse doesn't work, but then you're in the 25% tax bracket. If you max out $18k 401k and $5500 Trad IRA for 40 years, you could end up with a balance over $5 mil. Then, if you withdraw roughly 4% of that per year, that's $200k which will probably be taxed at an effective rate of maybe 20%. So you're not getting that much tax benefit and could even put yourself over some income limits like getting your Social Security benefit taxed and paying higher premiums for Medicare Part B. I think it would be better to do the Roth IRA to have some tax diversification, and since it's tax free, withdrawals are not included in your income.

 

[iggles]

I suppose it's possible, if your spouse doesn't work, but then you're in the 25% tax bracket. If you max out $18k 401k and $5500 Trad IRA for 40 years, you could end up with a balance over $5 mil. Then, if you withdraw roughly 4% of that per year, that's $200k which will probably be taxed at an effective rate of maybe 20%. So you're not getting that much tax benefit and could even put yourself over some income limits like getting your Social Security benefit taxed and paying higher premiums for Medicare Part B. I think it would be better to do the Roth IRA to have some tax diversification, and since it's tax free, withdrawals are not included in your income.

So my situation is a little bit different than most on this forum. I obtained an entry level position in a pharma company and can get my income in that phaseout range if I contribute enough to my 401k. If that's the case I should be able to contribute to my traditional ira in that same year correct? The reason I'm contributing to these tax deferred accounts is because they will lower my AGI which lowers my monthly student loan payments while enrolled in the PAYE program. I just did some crude calculations and figure I'll be saving around 75,000 in income taxes+student loan payments in that 20 year window. Do you think I should follow through with this plan, contribute to both a traditional and roth IRA each year, do a back-door roth after my student loans are forgiven in 20 years, or just stick to a roth?

 

[pezdispenser]

So my situation is a little bit different than most on this forum. I obtained an entry level position in a pharma company and can get my income in that phaseout range if I contribute enough to my 401k. If that's the case I should be able to contribute to my traditional ira in that same year correct? The reason I'm contributing to these tax deferred accounts is because they will lower my AGI which lowers my monthly student loan payments while enrolled in the PAYE program. I just did some crude calculations and figure I'll be saving around 75,000 in income taxes+student loan payments in that 20 year window. Do you think I should follow through with this plan, contribute to both a traditional and roth IRA each year, do a back-door roth after my student loans are forgiven in 20 years, or just stick to a roth?

Honestly I don't recommend being in debt for 20 years hoping for a $100k windfall from the government. They can't even keep their word on $1,000. I think it's best to learn how to control your spending and get really focused and motivated to pay off your loans as fast as possible. Then use that same motivation, and your confidence and freedom once you are debt free to continue improving your career, income and lifestyle.

Anyway, if you earn $75k and want to max out $18k 401k + $5500 Traditional IRA (limit is $5500 across all IRAs so can't do Roth as well), you won't have much left to live on.

75k gross
-18k 401k
-5.5k Traditional IRA
-6k Federal tax
-? State income tax
-5.7k SS and Medicare
-5.7k student loan payments
====
34.1k or $2,842/mo