Ask an Advisor: Can I Roll Discounted Employee Stock Into a Roth IRA?

Can discounted employee stock be rolled over into a Roth IRA? – Anonymous

I’m going to assume that the discounted stock you own is from an employee stock purchase plan (ESPP) that you participate in. An ESPP lets you set aside money from your paycheck to buy company stock at a discount, which is typically between 5% and 15%.

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If the discounted company stock you own is from an ESPP, you cannot roll over the proceeds to a Roth IRA. Discounted stock purchased through an ESPP is held in a taxable brokerage account, and that type of account cannot be rolled over to a Roth IRA.

With that said, it sounds like you are looking for ways to increase the amount of money in your Roth IRA. So, I’d like to present a few strategies that you could consider. I’ll also explain how an ESPP may offer certain tax advantages and how those benefits could factor into your broader savings plan.

Roth IRA Contributions

Making Roth IRA contributions is the most straightforward strategy for increasing the amount of money in your Roth IRA.

Even though Roth IRA contributions can be beneficial, there is a major caveat: you must have earned income (compensation from a job) in order to make a contribution. You can’t sell some of your employer stock then turn around and use the proceeds as the Roth IRA contribution.

If you are employed, you must also make sure that your income, and your spouse’s income if you’re married, is below IRS limits. In 2026, you can make the maximum $7,500 contribution to a Roth IRA as long as your modified adjusted gross income (MAGI) is below $153,000 as a single taxpayer, or $242,000 if married and filing a joint tax return.

Assuming that you are working and are under the IRS income limits, you may want to consider making Roth IRA contributions if you’re in a low tax bracket, like the 10% or 12% bracket. With a Roth IRA, the contributions you make are ineligible for any tax deduction because they’re made with money you’ve already paid taxes on.

Conversely, contributions to a pre-tax IRA are deductible, meaning they are not taxed in the year you make the contribution. In general, Roth IRA contributions are more appealing when you’re in a lower tax bracket than if you’re in a higher tax bracket. (But if you need additional help deciding between tax-deferred and Roth accounts, consider working with a financial advisor.)

Roth Conversions

A Roth conversion is another way to fund a Roth IRA. This maneuver involves transferring money from your pre-tax IRA to your Roth IRA. Unlike Roth IRA contributions, you can complete a Roth conversion with or without earned income. In fact, it’s best to wait until low-income years to complete a Roth conversion.

In most cases, every dollar you convert is taxable in the year you make the conversion. For example, let’s say your taxable income puts you firmly in the 22% tax bracket. Furthermore, you move forward with a $50,000 Roth conversion in 2026. The tax consequence is that you’ve added an additional $50,000 of taxable income, increasing your tax bill by $11,000.

Why would someone move forward with a Roth conversion if they have to pay taxes on the converted amount? In general, people benefit from completing a Roth conversion if:

They’ve retired and haven’t started receiving Social Security: If they can use a taxable brokerage account to cover their expenses, the income on their tax return can be quite low, making their tax bill less burdensome.
They won’t need all of their required minimum distributions (RMDs): As the name implies, RMDs are minimum amounts that you must withdraw from pre-tax IRAs and 401(k) plans once you reach a certain age. However, some retirees don’t need their full RMD to support their lifestyles. Since RMDs don’t apply to Roth accounts, some people may do a Roth conversion to reduce their future RMDs.
It reduces their lifetime tax bill: A Roth conversion reduces the amount of money in your tax-deferred account, thereby reducing your RMDs and taxable income in the future. Sometimes, paying more in taxes this year will actually save you more in future tax years.

Roth conversions can be an extremely useful tax strategy, but they can be difficult to execute, especially when calculating the appropriate amount to convert. I highly encourage you to work with a tax professional or financial advisor before moving forward with such a strategy. (And if you need help finding a fiduciary financial advisor to work with, try this free matching tool.)

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How to Manage Your Discounted Stock

As I mentioned previously, I’m under the assumption that your discounted stock is from an ESPP.

Typically, the discounted stock of your employer is held within a separate brokerage account, which is subject to a different set of tax rules than IRAs and 401(k)s. Those rules are further complicated when the stock held is from an ESPP.

The tax benefit of an ESPP occurs when you sell your discounted stock. A portion of your gain may be subject to more favorable capital gains tax rates, while the “discounted” part of your stock is taxed at ordinary income rates.

For example, imagine that you are allowed to purchase your company’s stock for $50 per share when the stock has a value of $55 per share. You purchase 60 shares worth a total of $3,000. Two years later, you sell all 60 shares for $5,000. Of the $2,000 gain, $300 is taxed as ordinary income, while the remaining $1,700 is taxed as a long-term capital gain.

This is an overly simplistic example because there are rules on how long you must hold the stock from both the purchase date and offer date. Failing to meet these holding period requirements changes the tax treatment of the gains. There’s a lot of tax complexity with ESPPs, so I encourage you to read p. 12 and p. 13 of IRS Publication 525. (Also, consider working with a financial advisor.)

Obviously, taxes play a factor in your decision to hold or sell your discounted stock. However, you should really consider the amount of discounted stock you own as a percentage of your total investments. Owning a lot of discounted stock can lead to big rewards, but also big losses.

Your company’s performance may have a larger impact on your portfolio than it would for an investor who does not participate in an ESPP or hold discounted company stock.

Your level of investment risk should typically be based on your specific financial situation. Nonetheless, you are assuming greater investment risk the more shares you own of one company.

Bottom Line

Given the facts provided, it sounds like the discounted stock is from an ESPP, making it ineligible to roll over into a Roth IRA. However, if you are looking to increase your Roth IRA holdings, you may want to consider contributing directly to one or doing a Roth conversion.

Portfolio Management Tips

To avoid overconcentration, choose a maximum percentage you are comfortable holding in one company or sector. For example, you might decide that no single stock should make up more than 10% or 15% of your portfolio. That target can give you a clear framework for deciding how much to sell, rather than making an emotional decision based on recent performance.
Consider working with a financial advisor if you need help diversifying and managing your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAss e t’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Matthew Hofacre, CFP®, EA, MSPFP, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Matthew is a financial advisor and owner of Pay It Forward Financial Planning. He has been compensated for this article. Additional resources from the author can be found at www.payitforwardfp.com. Please note that Matt is not a participant in SmartAsset AMP and is not an employee of SmartAsset.