When Should I Sell My IRA Stock?
IRAs offer significant tax benefits, yet have their own set of rules. They differ from brokerage accounts in several aspects, particularly regarding investment reporting.
Not all clients need to sell stocks in an IRA in order to meet their Required Minimum Distributions (RMDs), but it’s still wise to monitor share values and costs closely.
1. Short-term gains
An IRA’s main advantage lies in deferred taxation of gains. Outside an IRA, short-term capital gains would typically be taxed at ordinary income tax rates while within it they’re not subject to this rate of taxation.
Pam would realize a $5 per share gain if she sold her mutual fund shares for $15 each, however the tax reporting rules require losses only offsetting gains of similar type, so she would have to sell more shares from the same fund in order to offset them.
Also, taking cash out of her IRA in order to avoid tax on gains will decrease her investment options for future years and retirement dollars she can accumulate. By opting for an in-kind distribution instead, she could keep investing without incurring tax liabilities; and due to its lower price point could prove an excellent long-term bet.
2. Long-term gains
After experiencing a stock market crash, some investors may panic and sell off investments for short-term gains. It is important to keep in mind that stocks recover after experiencing a crash and giving up good investments can result in lost wealth.
IRAs offer one distinct tax advantage over brokerage accounts: any earnings on sales of investments within an IRA do not become taxable while profits from sales in regular brokerage accounts would be taxed as ordinary income.
Investors should keep in mind that long-term capital gains on investments sold from an IRA account can be achieved through using losses to offset those gains, provided they abide by the “wash-sale rule”, which requires them to not purchase “substantially identical” investments within 30 days before or after selling their original one; failing to comply may incur an unexpected tax bill.
When withdrawing stock from their IRAs, any profits are treated as ordinary income and taxed at regular capital gains rates instead of the lower IRA withdrawal tax rate.
There are exceptions to this rule; appreciated company stock held in an IRA can be withdrawn tax-free when distributed directly in-kind; this means the value of the stock distributed (including your cost basis) is reported on your 1099-R and serves as your new “buy slip” when calculating future gains or losses (unless the shares pass to heirs, who receive an increased basis).
If you want to avoid selling investments when their values drop, take your RMD in-kind when their current value appears low. Keep in mind, however, that market fluctuations could alter the actual value of securities transferred over to your taxable account.
4. Replacement investments
IRA accounts typically offer more investment options than 401(k) accounts, particularly from brokerages that cater to active traders. For instance, Firstrade provides commission-free trading of stocks, ETFs and options within its IRAs as well as hundreds of no-transaction-fee mutual funds; it even supports SEP and SIMPLE IRAs – something not all brokers offer!
Some IRAs invest in unconventional assets like private equity or real estate. Unfortunately, this may trigger complex rules regarding prohibited transactions and unrelated business income tax with harsh penalties attached.
Most retirees prefer not to liquidate their investment shares and withdraw cash withdrawals from their IRA, and can instead take their required minimum distributions in-kind by transferring shares into a regular taxable account and using them for living expenses and future investments. This will avoid tax liabilities while protecting your nest egg for later. To learn more about this strategy click here.