When Should I Sell My IRA Stock?
IRAs offer many advantages, such as investing in stocks and bonds from multiple sectors or even using it to trade options.
Watching your investment portfolio or 401(k) plan plunge can be heartbreaking. Yet panicked withdrawal could cost more than expected in terms of both time and money lost.
1. Sell When You Can
For investors trading stocks through traditional brokerage accounts, any profit or loss is subject to taxes at your marginal capital gains rate. But individual retirement accounts (IRAs) offer investors a way to sidestep such taxes by not reporting income on annual tax returns.
Only certain actions are prohibited within an IRA account, such as selling short (selling an option to cover risk without actually owning the asset itself) and trading on margin; however, investors can put various options strategies – from hedging to speculation – into effect in their account.
Do not let fear of an increased tax rate prevent you from making smart moves in your retirement accounts. If you have gained in taxable accounts, take steps before moving them to an IRA; similarly if your bracket will rise soon enough, an early Roth conversion might be beneficial while markets are down – just consult your Financial Advisor first before taking this route.
2. Sell When You Can’t
IRA rules prohibit trading stocks to capture losses or increase gains; breaking this rule (known as the wash-sale rule) could result in an unexpected tax bill. Furthermore, IRAs do not support active trade strategies like day trading or frequent trading to maximize returns.
After turning 701/2, retirement account assets become subject to RMDs (required minimum distributions). Any withdrawals reported as ordinary income and taxed at your bracket rate.
Investors can avoid this tax hit by taking their RMD in kind – that is, moving assets from an IRA into a taxable brokerage account – whereby the value of shares withdrawn from an RMD is reported on Form 1099-R similar to an all-cash withdrawal. Casciotta cautions that this can backfire if an original cost basis in the IRA is lower than sale price; then short-term capital gains tax would apply on this lower original cost basis amount withdrawn.
3. Sell When You’re in a Loss
When the stock market takes a tumble, panic selling can be tempting as a means to stave off losses. Unfortunately, this may be one of the worst decisions for your retirement portfolio.
For instance, when selling stocks from your IRA to cover expenses, the IRS will tax the proceeds at ordinary income rates instead of long-term capital gains rates – potentially nullifying any gains and leaving you with an overall negative total return from investing in them.
An alternative approach would be to find ways to circumvent capital-gains taxes, which may seem intimidating at first. You have several options available to you to you that won’t incur capital-gains taxes: giving stocks away or leaving them to your heirs can provide them with a step-up in basis and bypass capital gains tax on any appreciation, and your Financial Advisor can assist with calculations; other possibilities may include using them to meet required minimum distributions (RMDs) or even converting to a Roth IRA, which won’t incur income tax on investments for as long as they remain inside it!
4. Sell When You’re in a Gain
Trade is any order placed within your brokerage account for buying or selling. Investors sometimes engage in frequent trading to try and maximize profits quickly or make quick gains, however this strategy can prove expensive.
IRAs allow you to trade stocks just like in any brokerage account; however, unlike with taxable accounts, when withdrawing investment earnings from an IRA the IRS taxes them at ordinary income rates.
So if you withdraw stock profits from your IRA, they could leave you facing a potentially sizable tax bill. One way of mitigating this risk is through “tax-loss harvesting”, which involves selling stocks at losses with proceeds used against future capital gains of the same kind; but losses can only be used against gains of equal type; additionally they cannot be repurchased within 30 days prior or post sale.
Categorised in: Blog