An individual retirement account (IRA) can provide significant tax benefits. Depending on the type of account, you may receive a tax deduction for your contributions or be able to withdraw money tax-free. Stock shares are among the most popular types of IRA investments. The Internal Revenue Service has strict rules regarding transferring property, such as shares, to an IRA.
You Cannot Contribute Stock to Your IRA
You cannot contribute shares to an IRA – all contributions must be in cash, checks or money orders. The IRS treats the selling of property to your IRA as a prohibited transaction.
If you or your beneficiary do a prohibited transaction, the IRS will no longer treat your account as an IRA as of the first day of the year. Instead, the IRS treats the IRA balance as if you withdrew it on January 1 at its fair market value on that date. The IRS will likely hit you with taxes and penalties.
Read More: How to Add Money to a Traditional IRA
You Can Roll Over Stock into an IRA
Suppose you already own stock in another IRA or qualified retirement plan (i.e., 401(k), 403(b) or 457 accounts). In that case, you can roll over some or all the shares into a traditional or Roth IRA. A qualified retirement plan meets certain legal requirements that make it eligible for specific tax breaks.
If you roll over stocks into an IRA, you must transfer securities identical to those in the source account. Qualified rollovers to a traditional IRA are tax-free, meaning you do not include the monetary value of the transferred assets in your current taxable income. You can also roll over shares to a Roth IRA from a qualified account, with the following tax consequences:
- If the source account is a traditional IRA or qualified retirement account, you must include the cash value of the shares in your current taxable income. The cash value is based on the stock price at the time of the transfer.
- If the source account is a Roth account, you do not include the value of the shares in your current taxable income, as you’ve already paid the income tax on your Roth contributions.
There are three ways to complete a stock rollover: Trustee-to-trustee transfers, direct rollovers and 60-day rollovers.
A trustee-to-trustee transfer is the simplest way to move assets from one IRA to another. You initiate the process by informing the destination IRA trustees of your intentions.
You must submit forms with the relevant source account information and an exact specification of the shares you want to transfer. The destination trustee will then work with the source trustee to complete the transfer. There are no deadlines or withholding requirements for a trustee-to-trustee transfer and no taxes except for Roth conversions.
Your IRA can transfer to your spouse tax-free upon your demise.
Read More: IRS Rules for an IRA Transfer to a Spouse
Direct Rollovers to IRA
You can ask the administrator of your qualified retirement plan to transfer assets directly to an IRA. The administrator will give you detailed instructions on how to specify the assets, including stock shares, you want to move and then complete the rollover on your behalf. Direct rollovers have no deadlines or withholding requirements and are tax-free (except for Roth conversions).
If you take a stock distribution from an IRA or qualified retirement plan, you can deposit some or all shares into your IRA within 60 days. If you miss the deadline, the distribution will be part of your current taxable income (unless the source was a Roth account).
You must roll over the identical shares distributed to you. If the source account is a qualified retirement plan, the administrator will withhold 20 percent of their value, which you must fund with cash in your account (possibly from the sale of shares or other assets).
You cannot roll over or transfer assets that result from a hardship distribution, a required minimum distribution, a series of substantially equal periodic distributions, excess contributions or employer stock dividends.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.