One such student beneficiary worked at Walmart for the last three years to help pay for school. In turn, the retail giant handed him more than $5,000 in stock.
However, that student is a listener of the Clark Howard Podcast. So he knows just how often Clark professes his love to former U.S. Senator William Roth.
Roth, of course, was the legislative sponsor of the Roth IRA — perhaps Clark’s favorite type of retirement account.
What’s the best way to convert that Walmart stock into a fresh new Roth IRA?
Converting Stock in a Taxable Account Into a Roth IRA
How do I take my Walmart stock money and turn it into a Roth IRA?
That's what a listener asked on the Aug. 18 podcast episode.
Asked Brandon in Colorado: "I just graduated and started my first real job. I worked at Walmart for the last three years to help pay for school. I participated in Walmart's stock option and now have over $5,000 in Walmart stock.
"Since listening to you, I now want to start my Roth IRA as soon as possible. I would like to move these funds to start my Roth. What's the best way to do this? Would I cash in my stock and pay the taxes and fund the Roth? Or is there a better way?"
Clark is a huge fan of limiting your student loan debt coming out of college if at all possible. And of working to help pay for college. So he’s impressed with Brandon.
“That is so wonderful that you participated in the Walmart stock options. You used Walmart as a way to pay for school,” Clark says.
“Instead of calling me or writing me about all your student loans, you’re rolling in the money when you finish school and go to your ongoing after-school job. So I’m very, very impressed.
The Big Hurdle To Converting Stock To an IRA: Selling and Paying Taxes
The big decision Brandon needs to make involves taxes.
He’ll owe capital gains tax on the full $5,000+ once he sells his Walmart stock. But in 2023, if you’re a single filer, you can make up to $44,625 and pay 0% on long-term capital gains.
So for the Walmart stock Brandon has that he’s held for more than one year, it’s possible — depending on his final 2023 income — that he’ll be able to avoid paying any tax at all on it.
The short-term capital gains rates (sold in less than one year) start at 10% ($0 to $11,000 in 2023 income) and reach 22% for those making at least $44,726.
“You only owe capital gains tax, which is a very favorable tax,” Clark says. “If you’re just starting to work, you may be at a 0% tax rate on that gain. That’s right; there is an actual 0% tax rate on held investments held more than a year for certain taxpayers.
“If you’re just getting out of school, you may well qualify for the 0% tax rate this year. Or maybe a 10% tax rate.
"So you could in fact cash out, take the $5,000, pay little or no tax, and first year on a job, you are going to make enough, you could put a full $6,500 into a Roth. This would be the first $5,000 of it. And then the money would grow tax-free forever until you spend it in retirement."
Should Brandon Really Give Up His Walmart Stock for an IRA?
Clark loves low fees and diversification when it comes to investing. Think Vanguard index funds. Or, his personal favorite "easy button" for retirement, the target date fund.
In the context of retirement, $5,000 is a relatively small amount. But Brandon probably has decades for that money to grow before then. And, more importantly, he’s got a chance to set good investing habits right away.
Clark is in favor of swapping the Walmart stock into a Roth IRA.
“I love widely diversified funds,” Clark says. “Right now you have the world’s largest retailer and you’re so narrow in where your money is.”
Final Thoughts
As you can tell, Clark prioritizes contributing to a Roth IRA early and often.
If you have some stock outside of a tax-protected retirement account, especially if your capital gains tax rate would be low, he even thinks you should consider selling and shipping that money into a Roth IRA.
The post I Just Graduated With $5,000 in Walmart Stock. How Can I Convert It Into a Roth IRA? appeared first on Clark Howard.