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I just opened a self directed Roth IRA at E*Trade and have yet to make any purchases. I have some questions regarding taxes and the purchasing of stocks for my Roth:

1. Can I still write off commissions I pay to E*Trade for buying and selling in my Roth account?

2. Does the one year rule apply to stocks I trade within the Roth? In general I am a LTBHer, but if I bought and sold a stock within a year, do I have to pay taxes on earnings, or can I trade all I want with no worry of paying taxes on any earnings?

3. Can I write off capital losses I incur when selling a loser?

Thanks in advance everyone!

Keith
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Greetings Keith,

1. Can I still write off commissions I pay to E*Trade for buying and selling in my Roth account?

Not unless you can somehow get the commissions charged to a taxable account which I doubt.

2. Does the one year rule apply to stocks I trade within the Roth?

What "one year rule" are you talking about? Some mechanical strategies involve trading each year but somehow I don't think you mean that.

In general I am a LTBHer, but if I bought and sold a stock within a year, do I have to pay taxes on earnings, or can I trade all I want with no worry of paying taxes on any earnings?

Trade all you want with no worry of paying federal taxes on the earnings. I'm not sure how state or local income taxes may come into play here.

3. Can I write off capital losses I incur when selling a loser?

Maybe. From http://news.morningstar.com/doc/article/0,1,148349,00.html :
"Claiming a Loss on Your Roth IRA
It is possible to take a deduction for a loss on your Roth IRA, but it may not make sense in every situation. The loss you can take revolves around your "basis," or the amount you've invested with aftertax money. You must withdraw the entire amount in your Roth to be eligible to claim a loss. Since the money you withdraw is a qualified distribution (a return of your own contributions) you would not owe a 10% penalty.

This type of loss is not like a capital loss on a taxable investment. With taxable capital losses you can deduct up to $3,000 against ordinary income and carry the rest of your loss forward indefinitely. With a Roth loss, you must use it in the year you generate it. So if you sell your Roth in 2005 and realize a loss, you would claim it on your 2005 tax return. It goes on Schedule A and is subject to the 2% miscellaneous itemized-deduction threshold.

Think carefully before you liquidate your Roth IRA, however. For example, if your Roth is worth $20,000 and you pull it all out to recognize a loss, you'll only be able to put back $4,000 this year--the Roth contribution limit for 2005 ($4,500 for people over age 50). You would lose the advantage of having accumulated a greater balance in your account.

The same principle of taking a loss applies to nondeductible traditional IRA contributions, but not tax-deductible contributions. For more information, see IRA Publication 590."

Link to IRS Publication 590 -> http://www.irs.gov/publications/p590/index.html

Regards,
JB
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What "one year rule" are you talking about?

JB,

I think he's talking about the difference in tax treatment for long-term vs. short-term capital gains.

(Keith, I apologize in advance if I'm wrong!)

RosieCotton
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think he's talking about the difference in tax treatment for long-term vs. short-term capital gains.

(Keith, I apologize in advance if I'm wrong!)
-------*,*------------------

The purpose of the Roth is so the money can grow tax free - so
No, you don't have to worry about the taxes under or over one year holding.
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Greetings RosieCotton,

I think he's talking about the difference in tax treatment for long-term vs. short-term capital gains.

Though there used to be 5 year capital gains rates different from the 1 year rate if you look at http://www.fool.com/taxes/2003/taxes030613.htm and had purchased stocks in 2003.

Regards,
JB
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1. Can I still write off commissions I pay to E*Trade for buying and selling in my Roth account?

2. Does the one year rule apply to stocks I trade within the Roth? In general I am a LTBHer, but if I bought and sold a stock within a year, do I have to pay taxes on earnings, or can I trade all I want with no worry of paying taxes on any earnings?

3. Can I write off capital losses I incur when selling a loser?


All these questions sound like you are trying to treat the tax treatment of Roth holdings like the tax treatment of taxable accounts.

There are no tax consequences for buying and selling shares in a Roth IRA.

1. People throw around "write off" as it meant something, but I can think of several interpretations of that phrase and only one of those interpretations is pertinent to taxable accounts holding stocks (i.e., commissions increase your "tax basis" when calculating capital gains), and has no meaning whatsoever for IRAs (Traditional or Roth). And, in addition, trading commissions must be paid from inside the IRA. Custodial fees, on the other hand, may be paid from either inside the IRA or from other monies, and, only if paid from other monies, is the custodial fee a "miscellaneous expense" that could be itemized in the section of Schedule A that is subject to 2% AGI exclusion.

2. Again, you are trying to apply taxable account rules to "tax favored" accounts. They do not apply. Since you don't declare any gains or losses while the assets remain entirely in the IRA (Roth or Traditional), there is no such thing as short-term capital gains or long-term capital gains. Two things to watch for are: (1) trading commissions must be paid from assets inside the IRA so excessive trading would reduce your returns by the amount of the commissions, and (2) keep an eye out for possible wash sales rules between taxable accounts (selling a stock at a loss) and an IRA (buying substantially the same stock in an IRA within the 30-day window of selling, either before or after the sales). (Informed opinion is that either the loss can't be recognized or this is to be treated as a prohibited transaction, the tax principles being "related party" transactions and "getting the benefit without giving up the control" of the asset. Until either the tax courts or Congress clarifies the situation, informed opinion is to avoid the situation.) Since activity inside an IRA cannot be used for realizing a tax loss, wash sales rules don't apply to transactions that occur only inside the IRA.

3. No. You cannot do "tax loss harvesting" of individual securities in an IRA. The only way to recognize a loss in a Roth IRA account is to withdraw money from all Roth IRA accounts you have, close all the Roth IRA accounts you have, and the total of all contributions to the Roth plus the balance all conversions to the Roth minus the total of all withdrawals is your net loss. This net loss can then be declared on Schedule A in the section subject to 2% AGI exclusion. So, you must close all your Roth IRA accounts, the total withdrawals must be less than total of the funds placed in the Roth accounts (both by contributions and by conversions), the amount of the loss plus all other "miscellaneous expenses" (investing expenses, unreimbursed employee expenses, tax preparation expenses, etc.) must be more than 2% of your AGI, so only the part that exceeds that 2% AGI gets added to the bottom line of Schedule A, and Schedule A benefits you only to the extent that it exceeds your standard deduction. This isn't worth it for most people.

Additional resources:

"All About IRAs": http://www.fool.com/money/allaboutiras/allaboutiras.htm?REF=PRMPIN

IRS Publication 590: Individual Retirement Arrangements: http://www.irs.gov/pub/irs-pdf/p590.pdf
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The purpose of the Roth is so the money can grow tax free - so
No, you don't have to worry about the taxes under or over one year holding.


Right, I should have clarified that too.
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Though there used to be 5 year capital gains rates different from the 1 year rate if you look at http://www.fool.com/taxes/2003/taxes030613.htm and had purchased stocks in 2003.

Regards,
JB


Oh...

Rosie (learning something new every day)
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I've been away from my computer for a couple of days, but that was exactly the info I was looking for, thanks everyone! I wasn't clear about what I meant on the one year rule...but you were right, Rosie, I was talking about the difference b/w short and long term gains. Don't know why I thought there would be a difference on a Roth, but you never know. Thanks again everyone!

Keith
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