No. of Recommendations: 0
I started a Roth IRA account about a year ago, but I am still a bit unsure about some of the rules.

1. With my first $2000, I bought two good long term stocks (GE & UTX), and unfortunately two losers (SCH & CRA). I am considering selling the losers and buying into better long term prospects. First, can I sell and buy stock within my Roth IRA account? is there a penalty as long as I don't actually withdraw from the account? What are the tax implications? Can I claim a tax deduction on my losses?

2. Are contributions based on the calendar year or tax year. In other words, am I able to contribute $2000 in 12/01 and $3000 in 1/02, or $2000 in 3/02 and $3000 in 5/02?

Thanks for helping a beginner out!!
Print the post Back To Top
No. of Recommendations: 0
Author: bsc1708 Date: 12/12/01 11:22 PM Number: 32824
I started a Roth IRA account about a year ago, but I am still a bit unsure about some of the rules.

Rather than try to answer your questions, I think a much better approach is for you to read 'All About IRA's' in the Retirement section right here at The Fool. You can get there with this link: http://www.fool.com/money/allaboutiras/allaboutiras.htm

RK
Print the post Back To Top
No. of Recommendations: 7
1. First, can I sell and buy stock within my Roth IRA account?

Yes. Remember that commissions have to come from within the Roth IRA account, so excessive trading can eat up your Roth IRA in commissions.

is there a penalty as long as I don't actually withdraw from the account?

No.

What are the tax implications?

As long as you don't make a withdrawal (move money from inside the Roth IRA to outside the Roth IRA), there are no tax implications.

Can I claim a tax deduction on my losses?

Yes, but to do so you will have to close out all your Roth IRA accounts, and the total of all withdrawals ends up being less than the total of all contributions (plus all aftre-tax money that may have been converted to the Roth IRA). Then you can declare the difference as a loss in the 2% AGI exclusion section of Schedule A.

If you don't have other deductions that go into the 2% AGI exclusion section of Schedule A, you might find your deduction close to worthless, as well as now no longer having a Roth IRA. There is also a form to be filed with your tax returns when you make a withdrawal from your Roth IRA.

It is more likely over a long period of time that the Roth IRA would be more important for long-term growth than a short-term tax deduction.

2. Are contributions based on the calendar year or tax year. In other words, am I able to contribute $2000 in 12/01 and $3000 in 1/02, or $2000 in 3/02 and $3000 in 5/02?

I don't follow your question.

Your Roth IRA contribution has to be associated with a specific tax year, but it can be made any time from January 1 of that year until the deadline for filing your taxes for that year, excluding exensions. For example, you can make your Year 2001 Roth IRA contribution (up to $2,000) any time from January 1, 2001 to April 15, 2002. Likewise, you can make your Year 2002 Roth IRA contribution (up to $3,000) any time from January 1, 2002 to April 15, 2003. Generally, the Roth IRA custodian will assume the contribution is for the current calendar year unless you specifically designate othewise.

am I able to contribute $2000 in 12/01 and $3000 in 1/02

Yes, that would be $2,000 for your Year 2001 Roth IRA contribution; $3,000 for your Year 2002 Roth IRA contribution.

or $2000 in 3/02 and $3000 in 5/02?

Yes, if your written directions are that the $2,000 contribution in March 2002 is for Year 2001 contributions you can, and then the May 2002 contribution can only be for your Year 2002 contribution.

You can even contribute $5,000 in March 2002, just as long as you designate that $2,000 is for your Year 2001 Roth IRA contribution and the other $3,000 is for your Year 2002 Roth IRA contribution. (My personal life example is that early February 1999 I filed my tax returns, then late March 1999, about six weeks after I did my taxes, I made $4,000 Roth IRA contributions on one check, $2,000 designated for 1998, $2,000 designated for 1999.)

Note that you have to qualify for the tax year for which the Roth IRA contribution is being made. For example, no matter when you contribute for your Year 2001 Roth IRA contribution, you must have sufficient "earned income" for year 2001, your year 2001 modified AGI must not exceed the phae-out amount, and you must fulfill the other requirements. (See "All About IRAs" or IRS Publication 590 at the IRS web site http://www.irs.gov)

On the other hand, it is rather ironic that you don't have to qualify by the time you make your contribution, e.g., I plan on making my $3,000 Year 2002 Roth IRA contribution in early January, most likely before I have $3,000 of earned income in the year 2002. But if it turns out I have earned less than $3,000 after Year 2002 is done and over, I would have to withdraw the excess.
Print the post Back To Top
No. of Recommendations: 0
2. Are contributions based on the calendar year or tax year. In other words, am I able to contribute $2000 in 12/01 and $3000 in 1/02, or $2000 in 3/02 and $3000 in 5/02?

When you contribute to an IRA, you must designate which year the contribution is for. So, you can only contribute $2000 designated for year 2001, and $3000 designated for year 2002. If you don't designate the year, your custodian will choose one.

There are restrictions on the date of designation. For say, year 2001, you are allowed to designate contributions for 2001 if you contribute between January 1, 2001 and April 15, 2002. For 2002 the date range is January 1,2002 to April 15, 2002. That's right -- the "IRA year" is 15.5 months long, and consecutive IRA years overlap.

So both of the situations you mentioned would be legal, as long as you designated the $2000 for year 2001, and the $3000 for year 2002, and didn't designate any other contributions for those years.
Print the post Back To Top
Advertisement