Can I Transfer Stock From a Brokerage Account to an IRA?

Transferring stock from a brokerage account into an Individual Retirement Account (IRA) is possible, but involves specific considerations and rules. Key factors include the transfer method, stock valuation, and associated tax implications. This article explains the process and consequences of moving stock into an IRA.

Eligibility and Transfer Methods

Stock transfers to an IRA fall into two categories: an in-kind transfer or a cash transfer. An in-kind transfer moves the actual shares of stock from the brokerage account directly into the IRA. A cash transfer involves selling the stock in the brokerage account first, then contributing the resulting cash to the IRA. Both methods are allowed, but have different implications, particularly regarding taxation.

Most types of IRAs, including Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs, can receive stock contributions, subject to annual limits. Each IRA type has specific eligibility criteria, which must be met by the contributor.

Many publicly traded securities are eligible for transfer. However, certain assets like collectibles or life insurance policies are prohibited from being held within an IRA. Confirm with your IRA custodian that they can accept the specific stock you intend to transfer before initiating any transfer.

Stock Valuation and Contribution Limits

For in-kind stock contributions to an IRA, the contribution value is the stock’s Fair Market Value (FMV) on the date the contribution is made. This FMV is based on the closing price of the stock on the day it is officially deposited into the IRA. This valuation counts directly against your annual IRA contribution limits.

The Internal Revenue Service (IRS) sets annual limits on the total amount an individual can contribute to their IRAs. Any stock transferred into an IRA, whether in-kind or as cash from a sale, must adhere to these limits.

Exceeding annual contribution limits can lead to penalties. An excess contribution is subject to a 6% excise tax each year it remains in the account. This penalty applies until the excess amount is withdrawn from the IRA. Rollovers or conversions typically do not count towards annual contribution limits.

Steps to Transfer Assets

The process of transferring stock from a brokerage account to an IRA begins by contacting the IRA custodian where you wish to deposit the assets. Most financial institutions have specific forms and procedures for in-kind transfers or for receiving cash contributions. You will need to complete a transfer initiation form provided by the IRA custodian, which authorizes them to request the assets from your current brokerage account.

The IRA custodian will then communicate with your current brokerage to facilitate the transfer. This involves completing necessary forms, which require precise details about both the sending brokerage account and the receiving IRA, including account numbers and the specific securities to be transferred.

The timeline for these transfers can vary, taking anywhere from a few business days to several weeks, depending on the financial institutions involved and the complexity of the transfer. Ensure that your IRA account is properly established and ready to receive the assets before initiating the transfer. Confirming all details with both the sending brokerage and the receiving IRA custodian can help prevent delays or complications.

Tax Implications of Stock Transfers

The tax consequences of transferring stock to an IRA depend on whether the stock is transferred in-kind or sold for cash first. When stock is transferred in-kind from a taxable brokerage account directly into an IRA, the IRS treats this transaction as a “deemed sale” at its Fair Market Value (FMV) on the date of transfer. If the stock has appreciated in value since you originally purchased it, you will realize a capital gain, which is taxable in the year of the transfer.

Conversely, if the stock has decreased in value and is transferred in-kind, you cannot claim a capital loss. To realize a capital loss for tax purposes, the stock must be sold in the open market, not transferred as a deemed sale. If you choose to sell the stock in your brokerage account first and then contribute the cash to your IRA, any capital gains or losses are realized at the time of the sale, just as with any other stock sale. This approach allows you to manage the timing of your capital gain or loss realization.

Once assets are inside a Traditional IRA, their growth is tax-deferred, meaning you will not pay taxes on earnings until you withdraw them in retirement. Contributions to a Traditional IRA may also be tax-deductible, depending on your income and whether you are covered by a retirement plan at work. For a Roth IRA, contributions are made with after-tax dollars, so they are not tax-deductible. However, qualified distributions from a Roth IRA in retirement are entirely tax-free, including all earnings.

Transferring stock into an IRA is not considered a prohibited transaction under IRS rules, assuming it is a direct contribution of publicly traded securities. The wash-sale rule, which prevents claiming a loss on the sale of a security if a substantially identical security is purchased within 30 days before or after the sale, does not apply to contributions to an IRA. This is because the contribution is not considered a “purchase” for the purpose of triggering the wash-sale rule in this context.