Investment question (using brokerage account to fund a Roth IRA)

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DMD3.

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DMD3.
I’m relatively new to investing, but a few years ago with some help from a family member, I set up a Roth IRA and put the max amount for that year. Aside from adding a few drips & drabs here and there, I haven’t done much with the Roth. Then a couple of months ago, I started an individual brokerage account.

For the most part, I understand the difference between a Roth IRA and an individual brokerage account. With an IRA, I’m not taxed on whatever gains I make when I withdraw, but I have to wait until age 59.5, and I’m only allowed to invest $6k yearly (at the time of this post). With a brokerage account, I can invest however much I want, and I don’t have to wait until age 59.5. However, I’ll be taxed o when Icwithdraw; 40% if it’s within a year of when I bought the fund, 15% if it’s after a year (if I’m not mistaken).

My question is, could I eventually use the gains from the brokerage account to fund the Roth? A Google search seems to tell me that this is not allowed (it’s called an “in-transfer”). But what’s to stop me from selling the stock in my brokerage, transfer that money to my personal bank account after paying taxes, then turning right around to transfer it to the Roth account?

I realize this would take a fairly long time to get a brokerage account large enough to where I can casually withdraw from the brokerage and use that taxed money to max out the Roth. And it would be unwise to totally neglect the Roth while trying to build up the brokerage, for time is NOT on our side. A 20 yr old who only invests a few hundred yearly in an IRA would retire with more than a 40 yr who old who maxes it out every year.

Lastly, I know to actually buy funds once I’ve transferred the money to the brokerage firm, otherwise the cash would just sit there not earning. I’ve gotten that mistake out of the way. :D
 
“But what’s to stop me from selling the stock in my brokerage, transfer that money to my personal bank account after paying taxes, then turning right around to transfer it to the Roth account?”

Nothing, provided you are working. I believe you can only contribute to an IRA if you have earned income equal to or more than your contribution, although there is an exception for non-working spouse.
 
Correct, must have income in excess of the amount contributed to the Roth IRA.

That being the case, does your offer a 401k? If so is it offered with a Roth option? Is there a match?

Take the match, preferably in a Roth 401k first.
 
Also, your income must be below certain thresholds (something above a $100k IIRC) to make a Roth contributions.
 
Couple minor points. And I’m not an expert
1. You’re taxed in broker account not when you withdraw, but when you sell. Also this can get very complicated with gains and loses if you trade a lot. Be careful
2. It’s not 40% within a year. It’s taxed at your normal rate. Same as your other income. After 1 year, capitol gains taxes kick i. And it’s (usually) 15%

IRAs and ROTh IRAs have many restrictions. Standard accounts have none. It’s not relevant how or from where you contribute to IRA as long as YOU(or your spouse) do it within the restrictions allowed. Including earned income, which has to be at least as much as you contribute and up to an allowed amount
 
You are new to investing, so probably young with ‘earned income’? With a job & that earned income, you can do whatever to fund the Roth, assuming you are under the income limits.

Say you make $75k a year from a job. You can fund the Roth wherever you get the $$ from. There may be tax implications to sell stocks to fund it.

One should save into tax advantaged investing as much as possible, IRA’s, 401k type accounts, even a Health Savings acct, & 529 for any collage savings. Once a direction is figured out, then decide what type of investments are held in those accounts.

We’ve seen crypto in the news lately, I know of another that got tripped up in a pyramid scheme of sorts. I’m also Leary of investments with high fees, often hidden. Just saying, bring some common sense & scrutiny to the table.
 
I’m 35 yrs young, so I still have some years ahead of me :D,but definitely have some years behind me :(.

I currently have stock in the S&P 500 index fund. Low risk/low reward. In the words of Dave Ramsey, it’s a “get rich slow scheme”.

I’ve currently grossed $43k this year (I’m a dumptruck driver, and no two paychecks are ever the same due to the fluctuation in hours worked, so I can’t multiply my gross pay to determine annual pay), so I definitely qualify for the Roth (already started it a few years ago), but income is enough to max it out ($6k). I’m just wondering if using the gains from the brokerage account would eventually be a good way to help fund the Roth.
 
DMD3. said:
… I’m just wondering if using the gains from the brokerage account would eventually be a good way to help fund the Roth.
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Not anywhere in the near to mid term.

$6k/yr is just about 15% of your income invested in a retirement account. You should be able to hold an S&P500 Index fund inside your IRA.
 
The simple answer to your question is “yes”. But this is convoluted.

Is your plan to invest in brokerage account to generate income to then invest into Roth? That seems like an unnecessary step. Including unnecessary taxes in between. Brokerage investment is really for income generation. In a same way as your salary is. Sure. You can then use it for whatever, or save it.

But if you have enough to put in Roth, that should be maxed first. Then if you have more money left over, invest into brokerage account. With that(much better) strategy, you won’t really be moving money from brokerage to Roth unless your salary drops below levels where you can have enough to invest into ira and broker account starts generating significant income.

IRAs allow just about all the same investments as brokerage accounts. And same management. But have significant tax advantages.
 
DMD3. said:
I’m relatively new to investing,
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FWIW: its always good to keep in mind what your main goal is when investing and to understand that those goals are very subjective to you and your specific plan. There is no one-plan-fits-all. That said, my investment goals were strictly based on retirement income goals for a specific age vs looking for the highest return or yield on an investment. And the best advice I was ever given, and one that I pay forward every chance I get, is that compound interest is your biggest ally to grow money over the long term. Good luck.
 
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Pugs said:
Step 1

https://www.amazon.com/Bogle-Mutual-Funds-Perspectives-Intelligent-ebook/dp/B00X6BJ60K/ref=sr_1_1?keywords=bogle+on+mutual+funds&qid=1668549702&sprefix=bogle+on+,aps,188&sr=8-1

Don't worry about step 2 :D
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I am so pleased to see someone recommend this. I was going to if nobody else did. My mom initiated me into the wisdom of John Bogle and it has paid off in spades, as it did for her and Dad. I was able to retire early with a very comfortable income. I am a confirmed Boglehead (yes, that's a thing).

No one asked about crypto, but the only person I know who invested in it invested a small amount that he can easily afford to lose (and probably has--I haven't gotten around to asking). I think the whole thing sounds suspicious. Too much hype, and if there is anything that should make an investor run for the hills, it's hype. Most would not call me conservative, since I actually hold "too much" in stocks for my age (but as with all things, it depends), but I'm sure conservative about anything that is hyped.
 
Palmpilot said:
There's also SPY, which is an S&P 500 exchange-traded fund (ETF). It trades just like a stock.
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Thanks for that, I just bought a few shares yesterday. I wonder how long this fund has been around?


Also, thank to everyone for your replies. While I do NOT underestimate the importance of investing in the Roth IRA and being able to withdraw without being taxed, I also want to be able to enjoy some profit before age 59, as there’s no promise that I’d be healthy or even alive to be able to enjoy the profits by then. I have no reason to believe I won’t be around/active enough to enjoy all the profits at that age, so long as I take care of myself, but it’s not a guarantee.

Also, people at that age would argue that it’s better to enjoy savings at that age than never at all. But I would like to enjoy some things while I’m younger too. For example, I may want to……own an airplane. I mean no, not that! Never! Such a troll statement on a forum like this. :p
 
40% for shorting sounds wrong. I think the highest tax bracket is 37% if you make FU money.
 
DMD3. said:
Thanks for that, I just bought a few shares yesterday. I wonder how long this fund has been around?


Also, thank to everyone for your replies. While I do NOT underestimate the importance of investing in the Roth IRA and being able to withdraw without being taxed, I also want to be able to enjoy some profit before age 59, as there’s no promise that I’d be healthy or even alive to be able to enjoy the profits by then. I have no reason to believe I won’t be around/active enough to enjoy all the profits at that age, so long as I take care of myself, but it’s not a guarantee.

Also, people at that age would argue that it’s better to enjoy savings at that age than never at all. But I would like to enjoy some things while I’m younger too. For example, I may want to……own an airplane. I mean no, not that! Never! Such a troll statement on a forum like this. :p
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nothing wrong with investing for current income before retirement, just mixing the two is not very good strategy. Too much taxation

There is a number of S&P index ETF out there. VOO is another. There are also DOW and NASDAQ ETFs
 
eman1200 said:
40% for shorting sounds wrong. I think the highest tax bracket is 37% if you make FU money.
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While 40% is rather high, don’t forget state taxes.
 
I don't know any advantages of a mutual fund over an ETF, except that if you want to buy or sell, that transaction will happen at the next market close with a mutual fund. But you don't know what price you'll get until the transaction is finished.

With an ETF, you can set your buy/sell price, and get it. You just don't know when that transaction will happen.

ETFs have lower fees. An ETF is a basket of stocks that stays unchanged through transactions. You buy and sell shares of the overall basket.

With a mutual fund, you own pieces of all the stocks in the fund. As money flows in (net) they have to go out and buy more shares of all of the stocks, and when money goes out, (net), they have to sell pieces of all the stocks. That's complicated, and incurs trading fees.
 
genna said:
I wonder how the mutual funds advice in this book holds up in the face of ETFs that did not exist back when the book was written. Cheaper with a lot more direct control(that can be good or bad). Something that Vanguard itself promotes heavily.
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An ETF is effectively just a different type of mutual fund, with some of the differences noted by Crashnburn above. Although I haven't read Bogle's book myself, from what I've heard about it, I doubt that the differences would have much effect on his advice.
 
Palmpilot said:
An ETF is effectively just a different type of mutual fund, with some of the differences noted by Crashnburn above. Although I haven't read Bogle's book myself, from what I've heard about it, I doubt that the differences would have much effect on his advice.
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General advice - diversify, sure. But the book would be a lot shorter :).

Most of the advice of how to pick a mutual fund really does not apply to ETFs. They are un-managed and clearly defined. You always know what you are buying. There are also a lot less of them than mutual funds.
 
@DMD3. be cautious with Dave Ramsey - he sometimes gives psychological vs financial advice (ex: pay off some of your smaller debts first, even if higher rate, for the feeling of accomplishment. . . ).

His get rich slow approach . . . Is the right approach. Almost nobody (I'm saying professional stock pickers that do this for a living) beats the market over a 10year+ period. 1 year yes . . . 3 years in a row, a few folks. Consistently longer than that is very rare.

Rather than try to beat the market you are better off financially just being the market.

Most of the retirement planning gurus will tell you to pick 2-3 index funds and avoid individual stocks with the majority of your savings. Make set monthly payments in each (automatic asset builders).

If you want to follow and buy/sell a few individual
Companies, go for it, but that should be your hobby cash with your actual savings going into an SP500 fund (bulk), whole US market fund (smaller chunk to pull in mid and small caps, or get a mid/small cap fund) and international (smallest %).

Also note as you get closer to using the funds and move towards bonds, bond funds are NOT the same as bonds. Bond funds take losses even when the underlying bonds are still paying. If you own the bond and they don't default you can get the interest and then principal at maturity.

If you own a bond fund they take losses when they are forced to sell the bonds before maturity to make redemptions to participants in the fund and rebalancing etc. I've read a handful of places that encourage you to buy actual bonds vs a fund when the time comes.
 
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DMD3. said:
. . .With an IRA, I’m not taxed on whatever gains I make when I withdraw. . .". :D
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Wait. . .is that right? I thought withdrawals from an IRA funded with pre-tax dollars were taxed as ordinary in come when you hit retirement age and started taking distributions? That the IRS didn't differentiate between contributions and gains in those accounts?
 
It makes no sense to put money in a taxable investment, let it grow, then move it into a Roth IRA. Just put the money in the Roth IRA in the first place so you aren't paying taxes on the growth.
 
Larry in TN said:
Just put the money in the Roth IRA in the first place so you aren't paying taxes on the growth.
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The problem with Roth only is the income limits. Unless that wasn't an issue to make the max contribution.
 
Sundancer said:
Wait. . .is that right? I thought withdrawals from an IRA funded with pre-tax dollars were taxed as ordinary in come when you hit retirement age and started taking distributions? That the IRS didn't differentiate between contributions and gains in those accounts?
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His topic and the majority of the OP reference Roth IRAs, so I’d assume his one sentence is in the context of a Roth IRA distribution (after-tax dollars funding results tax free distributions) vs a Traditional IRA funded with pre-tax dollars resulting in Uncle Sam taking his tax bite on the distribution as ordinary income.
 
The real question, why would you pick this forum to ask anything related to this?
 
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