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In early 2020, I contributed $6000 to my Roth IRA. At the time, my salary was lower, so I didn't think my 2020 AGI would go above 125k.

Then I got a new job in mid-2020, which came with a big raise. So my 2020 AGI ended up being around 134k, which means my 2020 Roth IRA contribution of $6000 was over the limit. One solution is to do a recharacterization, i.e. move $6000 from my Roth IRA to my traditional IRA. (Then later I can move that $6000 from traditional right back to Roth.)

The problem is I don't have any cash left in my Roth; all of it is in stocks. Would one option be to transfer $6000 worth of stocks from Roth to traditional for the recharacterization? Or do I have to transfer $6000 in cash, in which case I'd have to sell some stocks first?

If I can recharacterize by transferring $6000 in stocks:

  1. Can I choose any stock, or does it have to be one that I bought in 2020?
  2. If I can choose any stock, how should I choose one so that I'm taxed as little as possible?

On the other hand, if I must recharacterize by transferring $6000 in cash:

  1. Can I choose any stock to sell for $6000, or does it have to be one that I bought in 2020?
  2. If I can choose any stock to sell, how should I choose one so that I'm taxed as little as possible?

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There's no tax on transactions inside an IRA. I don't know if the stocks can be transferred directly in the recharacterization, or if they would have to be sold, cash transferred, and then purchased again in the new IRA, but there is no difference between the two tax-wise. Also, the money in Roth IRAs is fungible. It doesn't matter which Roth IRA account you get the money to recharacterize from, or "which money" inside the account you use; what matters is that the amount transferred is the correct amount (the contribution amount to be recharacterized, plus earnings from that contribution, calculated proportionally out of earnings in all your Roth IRAs during that period of time).

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  • I've done a recharacterization with Vanguard and had them transfer stocks (ETFs actually) in-kind. Ideally they can transfer fractional shares so you can do the exact amount needed.
    – Craig W
    Mar 6, 2021 at 18:43
  • @CraigW So the IRS will be content with a stock transfer then?
    – Baekyeon
    Mar 6, 2021 at 22:04
  • @Baekyeon I'm sure the IRS will be fine with it; it's more an issue of what your brokerage can do.
    – Craig W
    Mar 7, 2021 at 12:29

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