Dear Liz: I have some money saved in a brokerage account, over and above my maximum 401(k) contribution. I just turned 60. Is it advantageous to move that money into a Roth IRA or should I keep it in the brokerage account?
Answer: If you suspect you’ll need this money within five years, then you probably should leave it in the brokerage account (and move it to cash, since money needed within the next few years should not be in the stock market). Otherwise, there’s little downside to moving some of the money to a Roth IRA, if you can, and plenty of upside.
Having money in a Roth gives you “tax diversification,” or a potentially tax-free bucket of money to draw from or leave alone as you see fit. That’s in contrast to 401(k)s, regular IRAs and other retirement plans, which typically require withdrawals to begin at age 72.
You can always withdraw an amount equal to your contributions without paying taxes or penalties. Once the account is at least 5 years old and you’re over 59½, whichever comes later, you also can withdraw any earnings without tax or penalty.
You can contribute up to $7,000 to a Roth this year, assuming you have earned income of at least that amount and your modified adjusted gross income is less than $124,000 if you’re single or $196,000 if you’re married filing jointly. (The contribution limit is $6,000 for people under 50.) If your income is above those limits, your ability to contribute to a Roth starts to phase out. The ability to contribute directly to a Roth ends when your modified adjusted gross income is over $139,000 for singles and $206,000 for married couples.
Why not put as much as he/she could into the Roth now, especially if it is cash? After all, the question mentioned money, not stock or other assets, in a brokerage account.
One reason I can think of not to is if he/she hasn’t already opened a Roth and thus has a waiting period, although that could be mitigated by making contributions for tax year 2019 and thus effectively starting that clock on January 1, 2019.
The other reason is if much of it is in appreciated assets, and selling those assets for the cash to contribute to a Roth would trigger taxes that might be avoided, for example, by passing those assets to heirs. However, depending on his/her income level, some capital gains might not be taxed.
But if those circumstances don’t exist, is there any other downside?