Can You Use a Taxable Brokerage Account to Max Out Your Roth?

Mia asks, “We can’t max out our Roth IRA this year, but have $70,000 in a brokerage. Should we pull funds from our brokerage so we can max out our Roth? So, y’all love Roth, but what’s the right way to think about this? Yes, we cannot provide any specific investment advice to you. I want to be very clear about that. We depend on it, but also taxes. How would you think about it? All right, so let me walk you through the scenario again, Ran.

Hey, this year things happen to be kind of tight. This year, things happen to be kind of tight. But normally, we max out our Roth IRA. We love putting money in Roth. I happen to have $70,000 in a brokerage account. Now, I will agree with you; we don’t know the embedded gains inside this brokerage account. If this is $70,000 of Tesla stock that she bought 10 years ago, there’s going to be a lot of embedded gain on that, a lot of tax consequence if you were to liquidate that. But save that being the scenario, and she says, “You know, I’ve got $70,000 sitting in this brokerage account. Might it make sense for instead, since I can’t do my $6,500 out of cash flow, should I consider pulling $6,500 out of my brokerage account and putting it into the Roth so that I don’t miss?”

Because here’s the thing, BR. I got this buddy, right, and he’s the entrepreneur guy. When he started his business, there were a few years where he did not max out Roth IRA. Do you know how many times I’ve heard from this sucker about not IR? Who would make that mistake? So he, I think — no, he’s a buddy of mine. I’m not going to say his name. But he told me, I think he would say, “Hey, if you can do the WTH, do the WTH. If you can’t do the Roth, do the Roth. If you can’t do the Roth, do the Roth.” Well, having $70,000 in brokerage suggests that she has a mechanism through which she can do Roth and not live in the perpetual state of regret that my good friend lives in.

Me, State B is picking on me because I’ve confessed that I missed out on some Roth contributions in the years that I was starting the company. You were, like, starting a business, though. I just want to say, I want to pay — but because I know we get 60-70% of our audience is a lot of new people, so they don’t know all the backstory, so I want them to be part of this too, so they see how cruel Bo treats me sometimes. But yeah, the thing, I think, Mia, I don’t disagree with what Bo’s saying. In a perfect world, if you’re sitting on, like, maybe your cash reserve is also in the brokerage account because you know that the money market mutual funds are paying higher than even the high-yield savings accounts are right now. You can get over 5%. There’s an embedded clue right there.

Then, yeah, let’s go ahead and make sure that we pay respect to our emergency reserves. But just like Step Four, the Financial Order of Operations would have you pay attention to, “Let’s get some of that money in that Roth.” I do want to caution you, though, because Bo gave — you know, it’s one thing to have long-term Tesla, but I’m more thinking about what about the person that bought into a holding in the fourth quarter of 2022 when the market was down? Even an index fund — it could be the S&P 500; it could be QQQ; you know, M or some of these other index funds that are out there. And you could be up 35-40% and not even hit 12 months yet. And instead of that being a 15 to 20% capital gain experience, it could be your ordinary income tax situation. That’s more what I was worried about.

Is that I love Roth, and I want you to fund it, and I think if you have access within your brokerage account to easy money that doesn’t corrupt your emergency reserves and doesn’t blow up your tax bill, by all means, use that because there’s a reason the government restricts it, and that’s what Bo’s hitting on. I have tremendous regrets. I couldn’t have done anything about it. I was just out of money. It’s like my house that I live in. I built this house, but at the end of the day, I couldn’t do any more upgrades or options because I was just — just at the point I had allocated all I could. And I think that happens in life, too. You just give it all you got, but you just didn’t, at the end of the day, you’re just out of money, and you made the best of the situation that was provided to you. And that’s what I want Mia to do. But I ran out when I was starting the company. It was just clean. And I was doing minimalism before — I don’t even think that existed back then, but I was — I was a practicing minimalist just off of the necessity of creating success. And, Mia, it sounds like you’ve got opportunity and options. Just go finish the drill of looking at all the different components to make sure you get the best answer. Love it. Have you downloaded our free Wealth Multiplier resource yet? This tool shows you exactly how much you need to be investing each month in order to reach $1 million by your target retirement age (and what every single dollar could turn into by retirement).