When Should I Sell My IRA Stock?
IRAs provide significant tax advantages. Unlike regular brokerage accounts, IRAs allow you to postpone paying taxes on capital gains, dividend income and interest until withdrawing it in retirement.
IRAs can be found from various brokerage firms, banks and mutual fund companies. Compare fees and minimum account opening requirements before selecting an institution to manage your IRA account.
Buying and Selling Stocks in Your IRA
An IRA’s main advantage over brokerage accounts lies in its tax advantages. Investors who choose an IRA can defer paying income taxes until withdrawing funds in retirement, saving themselves significant tax costs over a taxable account.
Withdrawals from an IRA must still be reported as ordinary income to the IRS on your tax return, though their amount owed will depend on what’s left in your account at the time of withdrawal. This can greatly reduce how much tax is due each year when your portfolio makes profit-generating sales.
Short-term trade profits made within an IRA don’t need to be taxed in the year they’re earned; however, they still count as ordinary income and may dissuade some traders from using it as an account for buying and selling securities.
An essential aspect of trading in an IRA is maintaining your cost basis. For instance, if you purchased shares of ABC company for $2 per share and sold them later for $10 each share, the difference between these prices will determine your cost basis and determine how much capital gains or losses must be accounted for on future sales. You can do this either through consulting the detailed records your broker provides or keeping copies of all trade confirmations.
An Individual Retirement Account (IRA) can hold various investments such as stocks, mutual funds and exchange-traded funds; however certain collectibles like art, stamps and coins cannot be included due to restrictions placed upon IRA accounts by the IRS and margin trading firms. Furthermore, these IRA accounts often impose certain trade limitations that do not exist with brokerage accounts as well as additional fees not typically assessed when trading.
Taxes on Stock Sales in Your IRA
Trading stocks within an IRA doesn’t count as income until they are withdrawn, after which their proceeds are reported to the IRS and taxed at your marginal tax rate, likely much lower than any capital gains tax rate applicable for stocks held outside an IRA.
If a client sells stock from their IRA, the IRS requires that they track its “basis”, also known as cost basis. For instance, if Pam purchased ABC stock for $2 per share before selling it for $3 per share later on in her IRA she must report a gain of $2,500 when reporting gains on tax forms.
Brokerage firms generally provide their clients with a cost-basis tool in order to help keep track of the basis for the shares they sell, though clients can also keep a copy of trade confirmations or records at home in order to calculate their cost-basis themselves.
As you near retirement, it’s essential that you review your asset allocation. If most of your retirement funds are invested in stocks, perhaps now is a good time to reduce exposure by diversifying into other forms of investments to protect yourself against an eventual loss.
Investment accounts such as IRAs and Roth IRAs are not covered by the FDIC, meaning they can be subject to investment risks such as the potential loss of principal. Furthermore, those withdrawing their IRA before reaching age 59 12 typically incur ordinary income taxes as well as an early withdrawal penalty of 10%. For more information on investing in an IRA please speak with a Schwab investment professional.