Do You Pay Taxes When You Sell Stock in an IRA?

An Individual Retirement Arrangement (IRA) serves as a personal savings plan with distinct tax advantages for retirement. These accounts offer a range of investment options, including stocks, bonds, and mutual funds. The primary benefit of an IRA is its ability to provide either tax-deferred or tax-free growth, depending on the specific type of IRA. This structure encourages long-term savings by offering incentives related to how investments are taxed.

Taxation of Stock Sales Within an IRA

Selling stocks inside an Individual Retirement Arrangement (IRA) generally does not trigger an immediate taxable event. This applies whether the account is a Traditional IRA or a Roth IRA. Capital gains or losses from these internal transactions are not subject to immediate income tax. The money can be reinvested within the IRA without current tax implications.

For a Traditional IRA, the growth is considered “tax-deferred,” which means taxes on earnings are postponed until funds are withdrawn in retirement. Conversely, a Roth IRA offers “tax-free growth,” where qualified withdrawals in retirement are entirely free of federal income tax because contributions were made with after-tax dollars. The ability to buy, sell, and re-buy stocks within the IRA without immediate tax consequences simplifies tax reporting compared to a regular brokerage account.

Tax Implications of IRA Withdrawals

The taxation of funds from an IRA occurs when withdrawals are made, and rules vary between Traditional and Roth IRAs. For Traditional IRAs, withdrawals are typically taxed as ordinary income in the year they are received, since contributions may have been tax-deductible or made with pre-tax dollars. An additional 10% penalty usually applies to withdrawals taken before age 59½. However, several exceptions can waive this penalty, such as withdrawals for a first-time home purchase (up to $10,000 lifetime limit), qualified higher education expenses, certain unreimbursed medical expenses, or distributions due to disability or death.

Required Minimum Distributions (RMDs) from Traditional IRAs typically begin at age 73 for individuals who reach age 72 in 2023 or later, and this age will increase to 75 in 2033 under the SECURE Act 2.0. Failure to take the full RMD by the deadline can result in an excise tax of 25% of the amount not withdrawn, which can be reduced to 10% if corrected within a two-year window.

Roth IRA withdrawals operate differently, with “qualified distributions” being both tax-free and penalty-free. To be qualified, the account must have been open for at least five years, and one of these conditions must be met: the account holder is age 59½ or older, is disabled, or the distribution is made to a beneficiary after the owner’s death. Contributions to a Roth IRA can be withdrawn at any time without tax or penalty, as taxes were already paid on these amounts. If a distribution from a Roth IRA is not qualified, the earnings portion may be subject to ordinary income tax and the 10% early withdrawal penalty.

Reporting Requirements for IRA Accounts

Even though selling stocks within an IRA does not generate an immediate tax event, certain reporting requirements apply to the account itself. The IRA custodian, which is the financial institution holding the account, is responsible for issuing specific tax forms to both the account holder and the Internal Revenue Service (IRS). These forms provide information about contributions and distributions, ensuring the IRS has a record of IRA activity.

One primary document is Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form is issued when a distribution or withdrawal is made from the IRA, detailing the gross amount distributed and the taxable portion. Another important form is Form 5498, “IRA Contribution Information,” which reports contributions made to the IRA for the tax year and the fair market value of the account at year-end. This form is informational and does not need to be filed with an individual’s tax return. Individual stock trades or sales occurring entirely within an IRA are generally not reported on forms like Form 1099-B, which is typically used for transactions in taxable brokerage accounts.