Can You Sell Stocks in Your Roth IRA?

A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to save for retirement. Contributions are made with after-tax dollars. Qualified withdrawals, including earnings, are tax-free and penalty-free in retirement. Selling stocks within your Roth IRA does not incur immediate taxes.

Managing Investments within a Roth IRA

Within a Roth IRA, you have the flexibility to buy and sell a wide range of investments, including individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The IRS permits these transactions without immediate tax consequences.

Any capital gains from selling investments within the account are not subject to immediate taxation. If you sell a stock for a profit inside your Roth IRA, you do not owe capital gains tax at that time. Earnings grow tax-free as long as they remain within the account.

These internal sales and investment activities are distinct from distributions or withdrawals from the account. Selling an investment inside your Roth IRA and reinvesting the proceeds within the same account is simply a portfolio management action. It does not count as taking money out of the retirement account.

The wash-sale rule disallows a loss deduction if you sell a security at a loss and repurchase a substantially identical security within 30 days in a taxable account. If you sell a security at a loss in a taxable account and repurchase a substantially identical security in a Roth IRA, the wash-sale rule is triggered. The disallowed loss is forfeited, as the IRA basis is not increased.

While internal trading within a Roth IRA does not create taxable events, certain strategies involving both taxable and Roth IRA accounts can still fall under IRS rules like the wash-sale rule. Understanding these nuances helps in managing your investment portfolio effectively across different account types.

Understanding Roth IRA Withdrawals

Taking money out of a Roth IRA is subject to specific rules, unlike internal sales. Roth IRA distributions are categorized as either qualified or non-qualified, determining their tax treatment.

A qualified distribution from a Roth IRA is tax-free and penalty-free. To be qualified, two conditions must be met. First, the Roth IRA must have been established for at least five tax years, starting January 1 of the year of your first contribution.

Second, one of several conditions must be satisfied for the distribution to be qualified:
Reaching age 59½.
Becoming permanently and totally disabled.
Distribution made to a beneficiary after the account owner’s death.
Distribution of up to $10,000 used for a first-time home purchase.

Conversely, a non-qualified distribution is any withdrawal that does not meet the criteria for a qualified distribution. If you take a non-qualified distribution, the earnings portion may be subject to ordinary income tax and a 10% early withdrawal penalty. This penalty applies if you are under age 59½ and do not meet one of the qualifying exceptions.

Exceptions to the 10% early withdrawal penalty exist, even for non-qualified distributions of earnings, although ordinary income tax may still apply to the earnings. These exceptions include:
Withdrawals for unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Health insurance premiums during unemployment.
Qualified higher education expenses.
Distributions taken as part of a series of substantially equal periodic payments.

When withdrawals are made from a Roth IRA, specific ordering rules apply to determine which funds are distributed first. The IRS mandates that contributions are withdrawn first, followed by converted amounts, and finally, earnings. Since contributions are always made with after-tax dollars, they can be withdrawn at any time, for any reason, without taxes or penalties, regardless of the account’s age or the owner’s age.

These ordering rules are relevant for non-qualified distributions, as they determine whether any portion of the withdrawal is subject to tax or penalty. The financial institution managing the Roth IRA handles this ordering automatically. Understanding these rules is essential for managing your Roth IRA funds and avoiding unexpected tax liabilities.

Reporting Roth IRA Transactions

Tax reporting for Roth IRAs focuses on contributions and distributions, rather than individual investment transactions within the account. Financial institutions, serving as IRA custodians, report specific information to the IRS. Contributions made to a Roth IRA are reported on Form 5498, “IRA Contribution Information.”

Form 5498 is an informational document summarizing your contributions for the tax year, sent by May 31 of the following year. You do not need to file this form with your tax return; it is for your records and the IRS. The form also reports the fair market value of your Roth IRA at year-end.

Selling stocks or other investments within your Roth IRA does not require reporting these internal transactions on your annual tax returns. These activities are not considered taxable events as long as funds remain within the account. The tax-free growth within a Roth IRA means that capital gains from such sales are not reported as income.

Distributions from a Roth IRA are reported on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” You will receive a Form 1099-R for any distribution, regardless of whether it is qualified or non-qualified.

If a distribution is non-qualified, you may need to report it on your tax return using IRS Form 8606, “Nondeductible IRAs,” to determine if any portion of the non-qualified distribution is taxable. Qualified distributions, being tax-free, do not require specific reporting on your main tax return.