If I realize current gains (about 3600%) on the stocks in my IRA will I be charged capital gains tax even though the IRA is supposed to be tax free? I'm new at this, I really think it's time to sell the long positions I'm holding, but I'm scared to death I'll be hit with a big bill.
My understanding is that income taxes on IRAs are not paid until the funds are withdrawn. How the money got there does not matter (capital gains, employer contributions, pre-tax investment, dividends, etc.). The downside is the taxes are paid at regular income levels with no credit for long-term gains.
IRA's proceeds are taxed as ordinary income not capital gains. If you have a Roth IRA you pay no tax after age 59.5.Ron
<If I realize current gains (about 3600%) on the stocks in my IRA will I be charged capital gains tax even though the IRA is supposed to be tax free? I'm new at this, I really think it's time to sell the long positions I'm holding, but I'm scared to death I'll be hit with a big bill.>I don't want to be overly critical because you did at least ask the question. However, a basic concept in FOOLDOM is to know what you are investing in. IRA's do have many complexities, but your question is certainly not one of them. Long before you made your first investment in an IRA you should have given yourself a much better understanding of IRA basics. Not knowing the answer to your simple question may have already cost you a fortune because you did not sell earlier. Many on this board would probably be interested in knowing just how you have gotten to where you are. Were the gains even higher a year ago? Even many FOOLS have seen a lot of their gains disappear over the last year. Do you have a good understanding of these individual companies? What is your DD telling you about their futures? You may be selling right as some of them are poised to make a strong recovery. Can you give us a little bit more in the detail department?BRG
If I realize current gains (about 3600%) on the stocks in my IRA will I be charged capital gains tax even though the IRA is supposed to be tax free? I'm new at this, I really think it's time to sell the long positions I'm holding, but I'm scared to death I'll be hit with a big bill.As long as the money remains in your IRA, there are no taxes to be paid on any realized capital gains, dividends or interest. Dan
I admit - when I opened my IRA years ago I didn't have a clue. My financial advisor told me to do it and so I did - at that time it was as involved in my money as I cared to be. I was very fortunate in the recent market downturn and my stocks have mostly recovered, with the exception of a couple of stocks (microsoft and intel which have been tremendous, and I'm not planning to sell them) the stocks in my portfolio have given lackluster returns even during the big bull. I am sitting on an over diversified a portfolio (27 stocks in all - far more than I can keep track of) most of which are companies that had major gains early on (in the eighties)and not much after. Several have the earmarks of companies in big financial trouble - negative cash flow, tremendous borrowing, huge drops in sales...I'f I'd taken a more active interest in my own IRA's before I would have noticed that I was sitting on some really stupid stocks (PNJA??!!) that my broker thought would be a good idea and might have been for the first year - typical stupid investor handing the reigns over to a "pro".All in all though - my returns have been good, so he did something right - If microsoft and intel wern't part of the portfolio I'd be singing a differant tune though.
Short answer: No trading you do inside your IRA results in any current tax liability. Only IRA distributions (that is, withdrawals) are taxed.Long answer: You have received good advice here. I particularly recommend the comments of gurdison. You can trade, realizing losses and gains, as much as you like inside your IRA and incur no taxes on the transactions. Your IRA will, of course, incur trading costs, that is, commissions.My advice is not to accept advice you get here or anywhere else without checking it out for yourself. DD, that is, due diligence. So, here's a site where you can check out for yourself what you've heard here. http://www.irs.ustreas.gov/forms_pubs/pubs/p590ch01.htm This is publication 590, the official Treasury/IRS document that answers questions like yours. In particular it says"Two advantages of a traditional IRA are: • You may be able to deduct some or all of your contributions to it, depending on your circumstances, and • Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. "I think that advice in not controversial. My more controversial advice is this: fire your stockbroker and move all your IRA equity investments to a low-cost no-load index fund, such as Vanguard Index 500. Your success in beating the market so far is no guarantee that you will continue beating the market. With an index fund, you will perform just like the market average, and thereby beat most investors and most professional managers over time.Some references for you:http://www.money.com/money/depts/investing/fundamentalist/archive/0001.html Did you beat the market? Most investors who say they do are just kidding themselves. http://www-snde.rutgers.edu/Rutgers/Econ103/beat_S&P500.html How to Beat 77% of Fund Investors Year After Year (through indexing)Also, I advise being leery of advice that comes from someone who would benefit from you acting on that advice. I'm not in that group; I have nothing to gain in you becoming an index investor. I don't trade stocks but, as an indexer, I benefit from people who do trade.This site -- http://www.investorhome.com/emh.htm -- explains what I mean. Exerpt:Most individuals that buy and sell securities (stocks in particular), do so under the assumption that the securities they are buying are worth more than the price that they are paying, while securities that they are selling are worth less than the selling price. But if markets are efficient and current prices fully reflect all information, then buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill. . . . The paradox of efficient markets is that if every investor believed a market was efficient, then the market would not be efficient because no one would analyze securities. In effect, efficient markets depend on market participants who believe the market is inefficient and trade securities in an attempt to outperform the market.Chips, cheerfully retired for nearly eight years now, mostly on index funds
Think of a standard IRA account as an envelope of protection. You put in untaxed dollars, then you can direct that things be bought and sold within the envelope without tax consequences. But, if you remove something from the envelope, it is called a distribution and you will be taxed on the whole amount of the distribution as ordinary income. The newer ROTH IRAs are different; for these, you put in already taxed dollars, you buy and sell merrily without tax consequences, and you can take distributions without paying taxes.
<I am sitting on an over diversified a portfolio (27 stocks in all - far more than I can keep track of)>27 stocks are too many to track for your entire portfolio, let alone your IRA. I think you do need to simplify.At this point, it is clear that you need to make an important strategic decision before proceeding any further. You need to decide whether or not to keep your current advisor, get a new one or to go it alone. Going it alone does not have to be frightening or complicated as Chips has pointed out to you. The Vanguard S&P500 index fund is cost effective, easy to understand and will beat most actively managed funds over the long haul. I would not discuss your concerns with your current advisor unless you are prepared to hear every possible reason under the sun why you should not leave him. He will not be objective as he has had a good ride up to now and would not want that to end. If you decide on a discount broker, you should be sure of the level of service you want before opening the account. The cheapest one may not be the best one for your needs. Regardless of your final decision it should be yours and yours alone.BRG
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