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Author: Mshahara Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75642  
Subject: May Stocks Be Contributed Directly Into an IRA? Date: 8/29/1999 4:45 PM
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While I suspect that the answer to my question is "no," I want to be sure. My wife has inherited some stock, some of which was purchased in the '50s and '60s by her grandmother, and which for arcane legal/trust reasons we are required to keep at the original cost basis. This contrasts with the usual inheritance scenario, in which inheritors of a stock are allowed to update the cost basis of that stock to reflect its actual value at the time of inheritance. Because we have to keep the original, extremely low cost basis on this stock, selling it - even simply to shift it to another investment (never mind deriving income on it, which we don't want to do) entails paying a high amount of tax.

So it occurred to me that if we were able to take, say, $2000 worth of one of these stocks and shift it directly AS stock shares into our IRAs, counting that as our annual contribution, we might be able to avoid having to sell the shares, and thus avoid the big tax bite. Then, once the stock shares were safely ensconced within the IRA, we would have the freedom to re-apportion the assets as we liked (i.e. to trade these stocks for others) - again, without having to worry about capital gains taxes. In effect, we would simply cease having to worry at all about the cost basis of the stocks, once inside the IRA.

If this direct stock contribution idea is viable, my wife and I would like to use it every year over many years, ideally until all the low cost-basis stock we have inherited is transferred into our IRAs. At the same time, we could contribute $2000 cash per year into the ordinary brokerage account from which the low-cost-basis stocks are transferred, in order to replace those stocks with others having a more reasonable, contemporary cost basis.

However, it seems to me that in the literature I read about IRAs, the only scenario treated is one in which a salary-earner contributes cash from earned income into the IRA. This makes me suspect that my direct-stock contribution idea is a non-starter.

So is it a non-starter? Or is it the brilliant idea I originally thought it was, before all these doubts started creeping in? Moreover, if direct stock contributions can't be made to an IRA, can they be made to, say, a child's education IRA or some other tax-protected vehicle?

Any hints, suggestions or answers to these questions will be appreciated.

Mshahara
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Author: zgriner Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13535 of 75642
Subject: Re: May Stocks Be Contributed Directly Into an I Date: 8/29/1999 9:10 PM
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While I suspect that the answer to my question is "no," I want to be sure . . . the only scenario treated is one in which a salary-earner contributes cash from earned income into the IRA . . . So is it a non-starter?

Yup, even if you bought the stock just now. It's a cash-only deal.

Your plan has a big hole in it, regardless. Why would you want to put the stock into an IRA, using your scheme, and convert a capital gains tax of 20% to an income tax of 28% or more?

A few ways for you to take advantage of the capital gains is to:
1) Donate some stock to a charity for an immediate full deduction
2) Donate it to a charitable remainder trust
3) If you and/or your wife can contribute to a 401k and have not maxed it out, sell the stock and use the proceeds to replace lost income from maxing out your 401k. In the short term, the 28+% value of the deduction will make for the 20% tax.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13540 of 75642
Subject: Re: May Stocks Be Contributed Directly Into an I Date: 8/30/1999 10:14 AM
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It is possible to move shares of stocks or mutual funds from one IRA to another. So if the shares are already in an IRA, with your wife named as a beneficiary, there may be hope. Otherwise, no.

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Author: Cicero007a Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13562 of 75642
Subject: Re: May Stocks Be Contributed Directly Into an I Date: 8/31/1999 1:43 PM
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You are the second person to state the answer "NO" to this type of question without quoting your source. As a retired Research Scientist, I used to make my living by questioning all opinions unsupported by data -- so -- what is the IRS publication that forbids this ?

Sorry if I seem rude, but all that I seek is the truth.

P.S. -- I disagree with your argument that this is a stupid thing to do. If one wishes to contribute to an IRA, one contributes say $2000 in cash. The question is can $2000 worth of appreciated securities be contributed instead. If this is permissable, one would never have to pay the capitol gains on the appreciation. It is similiar to contributing appreciated stock to a charity and taking a deduction for the total value.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13572 of 75642
Subject: Re: May Stocks Be Contributed Directly Into an I Date: 8/31/1999 3:28 PM
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Cicero007a writes:

<<You are the second person to state the answer "NO" to this type of question without quoting your source. As a retired Research Scientist, I used to make my living by questioning all opinions unsupported by data -- so -- what is the IRS publication that forbids this ? >>

I didn't answer the original query, but I can tell you that Section 408(a)(1) of the Infernal (sic) Revenue Code specifically states "Except in the case of a rollover contribution ..., no contribution will be accepted unless it is in cash..." (emphasis added) A rollover contribution of stock may be made from an employer's qualified retirrement plan or another IRA only.

<<The question is can $2000 worth of appreciated securities be contributed instead. If this is permissable, one would never have to pay the capitol gains on the appreciation. It is similiar to contributing appreciated stock to a charity and taking a deduction for the total value.>>

Sorry, but I don't follow your logic here. You might not pay tax during your lifetime, but your heirs or your estate certainly will, and all gain will be taxed at ordinary income rates. Why would you wish to have them pay that instead of nothing (they inherit stocks in a taxable account at market value on your demise)? If you do pay tax in your lifetime, then it, too, would be at ordinary rates instead of the favorable capital gains rate you could have enjoyed. Therefore, your statement makes little sense to me.

Regards..Pixy

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