Dear Dr. Don,
I am looking at investing in specific stocks in my Roth IRA. I have a 401(k) that my company automatically puts 15 percent of my gross income into. I also have an existing Roth IRA invested in CDs, but I want to add some additional earnings potential.
Let's say I have $1,000 of a specific stock and in a few years it has increased in value. Can I then sell it completely and transfer into a new stock for my Roth IRA? Am I correct in assuming that as long as everything is transferred, there wouldn't be any reporting or Internal Revenue Service penalties? I work with IRAs invested in CDs quite often but I'm not very knowledgeable about other investment vehicles.
-- Josh Jumble
When you hold stocks in a Roth IRA, they're held in a brokerage account. It's the account that is the IRA, not the individual stock holding. You can trade stocks within the Roth IRA brokerage account without triggering any IRS reporting requirements or penalties. You're not taking a distribution when you sell the shares and you're not making a contribution when you use the proceeds to reinvest.
I have a couple of IRA rollover accounts with a brokerage firm and I trade in those accounts. The trading doesn't have any impact on my current taxes. Because my IRA isn't a Roth IRA, I will eventually pay income taxes on distributions out of the retirement account.
May all your stock picks be winners, but if they're not, claiming losses in your Roth IRA accounts is complex enough that it's something to discuss with your tax professional. IRS Publication 590, Individual Retirement Arrangements, covers this ground for Roth IRAs in the section "Recognizing Losses on Investments."
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