When Should I Sell My IRA Stock?
IRAs offer long-term saving with significant tax advantages, with earnings not subject to tax until funds are withdrawn from an IRA account and taxed accordingly.
Stock profits withdrawn from an IRA are subject to ordinary income rates rather than capital gains taxes that apply when trading outside an IRA, so when is it best to sell?
1. When You Reach Age 59-1/2
Once you cash out your IRA shares, the brokerage account record reflects their new basis–the cost you paid when buying them within your IRA. That value will serve as the foundation for future gains or losses regardless of if the shares remain held until death.
Withdrawals from an IRA, including stock profits, are taxed at ordinary income tax rates rather than capital gains tax rates and may incur a 10% early withdrawal penalty if taken before turning 59-1/2.
If taxes on your IRA investments are becoming an issue, consider switching them directly into a Roth IRA. Roths are funded with money that you pay taxes on upfront; thus any earnings or gains within it will remain tax-free. You can learn more on the IRS website in Publication 590; additionally, speak to an advisor to understand which approach would best meet your needs and strategies available.
2. When You Have a Qualifying Event
IRS rules govern Individual Retirement Accounts (IRAs), yet they’re similar to regular investment accounts in that they allow investors to hold stocks, mutual funds and other nonrestricted investments. But IRAs do have specific rules which differ from non-IRA accounts.
One issue IRAs do not allow is short stock trading, which involves borrowing shares to sell on the open market to profit from any price decline in an attempt to profit from shorting, and margin investing, where you invest more capital than you own.
An obvious qualifying event to consider is an involuntary loss of health coverage, which allows for enrollment into a Special Enrollment Period. Other examples could include changing jobs or moving states. According to the IRS, documentation for each qualifying life event (QLE) varies based on type; examples could include marriage/divorce papers, birth/adoption certificates, death certificates and written job offers among others.
3. When You Have a Qualifying Distribution
Qualified Charitable Distributions (QCDs) may offer those inclined toward charitable giving an effective means of avoiding taxes on stock profits. IRA holders can use QCDs to transfer up to $100,000 directly to charities each year from their qualifying IRAs; the amount transferred counts as part of your required minimum distribution amount without appearing on your adjusted gross income statement.
As such, the capital gains tax avoids you completely.
4. When You Have a Qualifying Event
One of the greatest advantages of investing through a Roth IRA is its tax-free status; any profits (if any) derived from stock sales won’t be taxed as income for that year or at your ordinary or capital gains rates. In contrast, with regular brokerage accounts any gains would be included as income and taxed accordingly.
Roth IRAs provide another key advantage: you’re free to invest the proceeds from selling stocks without incurring IRS restrictions or restrictions from investors. Many investors choose to reinvest their earnings from selling IRA stocks into high-growth stocks that typically present greater risk, yet could produce larger returns than lower-risk bond funds.
Tax-loss harvesting allows traders to offset losses when trading stocks in a taxable brokerage account, but you cannot use this strategy with investments held within an IRA account. Therefore, it is crucial that you consider your individual circumstances when deciding when it is time to sell an IRA stock investment.