Selling shares within a Roth IRA
July 13, 2007 10:16 AM   Subscribe

What are the rules about selling shares held in a Roth IRA? Warning: still a bit of a finance n00b...

Maybe I am just Not Clear on The Concept, but it seems to me that, when the market's had a good few years and the stocks and funds I hold are up, I should sell them and lock in the gains. Since they're good companies (or good funds, as the case may be), I'd probably repurchase them with the proceeds. At least, this is what I would do if I owned these shares in a traditional brokerage account, but I own them within a Roth IRA. However, I can't find anything online about anyone doing having done this, let alone any advice about it!

I know that I can't sell my shares and divest from the IRA completely without paying an early withdrawal penalty. I also know about capital gains taxes and the wash sale rule and all that, and I know that those apply to taxable accounts. Are the same rules in place for Roth IRAs? Am I just missing the point of an IRA, or what?
posted by electric_counterpoint to Work & Money (16 answers total) 3 users marked this as a favorite
I'll skip the question about whether or not selling shares that are up with the intent of purchasing them later is a good idea. That's up to you to decide.

When you sell shares in a Roth IRA, you won't pay taxes (income or capital gains) on the gain, nor can you deduct losses from the gains made in a standard brokerage account. This is the whole point of a Roth IRA - you paid the taxes going in, so there's no taxes to be paid on the increase in value since then.
posted by 0xFCAF at 10:20 AM on July 13, 2007

I do a lot of trading in my Roth IRA. It has great advantages over a regular brokerage account because you can trade without ever paying capital gains.
posted by alms at 10:29 AM on July 13, 2007

Selling stock, then repurchasing the same stock doesn't seem like it'll do anything at all. You'll be selling at $x per share, then buying at $x per share, which doesn't "lock" in anything.

In any case, I'd think you wouldn't want to be doing a whole lot of futzing with your IRA anyway, unless you're of an age to start shifting from more volitile stocks, to steadier bonds. I've seen some new funds that do that sort of shift automatically at Vanguard, and a few other places.
posted by fnerg at 10:34 AM on July 13, 2007

If you want to continue to hold these companies, just hold onto the shares. 0xFCAF is correct in that there are no tax consequences at all to selling versus holding. Just do whats best for your returns and you'll be fine.

Say you're holding 10 shares of IBM. You sell, then rebuy at the same price. The only thing you've done is to have incurred two commissions on the trades.

If you are looking to get money OUT of the IRA, first, don't, it kills your retirement money, secondly you can withdraw the principal amount (amount you actually put in, not returns) based on some rules without penalty. You can get the rest out if you don't mind losing a bunch of it due to penalties.

An IRA takes pre-tax money (immediate 25% gain!) and lets you pay taxes only when you're old and withdrawing it.

A Roth IRA has you pay taxes on the initial input, but never pay taxes on that money, or any returns again. So when you're old, there won't be any tax at all on the roth money. So as long as it stays inside the Roth account, do whatever you like in regards to tax implications.
posted by cschneid at 10:34 AM on July 13, 2007

the wash sale rule doesn't apply in an Roth or non-Roth IRA.

you aren't trying to claim a capital loss since those tax rules don't apply. however, don't try to play games with the wash sale rule by selling stock in a taxable account and then purchasing the 'substantially identical' security.
posted by uaudio at 10:44 AM on July 13, 2007

*** your IRA. sorry.
posted by uaudio at 10:45 AM on July 13, 2007

Response by poster: Okay, so it looks like the idea of locking in gains was bad (I was thinking that I'd be able to buy more shares with the proceeds, forgetting that the shares are probably going to be at the same price I sold them at when I return to buy them back). But if I want to permanently get out of a position, selling it within the Roth is A-OK. I don't think my broker lets me carry a cash balance, but I could probably tell them to sell something and buy something else with the proceeds.

Good to know. Thanks, MeFi!
posted by electric_counterpoint at 10:49 AM on July 13, 2007

The idea of locking in gains in still valid, you just need to be willing to hold the proceeds of the sale in cash within the IRA (i.e. wait until the price of the stuff that you just sold goes down before you rebuy), or buy something else within the IRA.
posted by jcwagner at 10:56 AM on July 13, 2007

Response by poster: @The World Famous: I did, actually; it's what jogged my mind to post this question!
posted by electric_counterpoint at 11:11 AM on July 13, 2007

I don't think my broker lets me carry a cash balance

Of course they do. A brokerage account is pretty useless without the ability to buy stocks, and you do that using the cash portion of the account. Dividends also go into your account as cash. And when you're buying a stock but don't have quite enough to buy one more share, the leftover also remains in your account is cash.
posted by kindall at 11:12 AM on July 13, 2007

Best answer: Locking in gains is only valid with stocks, and only coupled with using the proceeds to buy another stock with good value or strong upside.
For stocks in your portfolio, since you are managing them, it may be a good excerise to try and get a decent value and peel off some of your gains in your current holdings. This is also good if you are not diversified in your current stock holdings; ie pick a sector that you don't currently own.
This is not necessary with mutual funds as the stocks within the funds are already being actively managed.
For funds all you need to do is really check them once or twice a year to see if they are performing well within their peer group. But I would only recommend swapping out of poor performing funds once a year at the most. Funds are designed to have the shareholders let them ride.
posted by thekorruptor at 11:22 AM on July 13, 2007

Locking in gains refers to selling an amount of stock equal to the cash gains that have resulted from the stock price going up. Although this does help insulate you from drastic price drops, it also limits the amount you can gain from price increases, because you end up owning less and less stock of a given company as the price of the stock goes up. Pick your poisen.
posted by lohmannn at 11:48 AM on July 13, 2007

gah poison
posted by lohmannn at 11:48 AM on July 13, 2007

Yes, your brokerage will allow you to carry a cash balance. You can contribute thousands a year to your Roth IRA without ever purchasing a single stock, bond, or fund. My money usually sits there a few weeks while I ponder my next transaction. Sometimes the brokerage will sweep the cash balance into a money market account automatically, which pays a low dividend.
posted by dendrite at 12:49 PM on July 13, 2007

Finance blog Get Rich Slowly is a great site for finance novices to learn about investment and other goodies. As it happens they've just finished a series on Roth IRAs. Hope that helps!
posted by puddpunk at 1:48 PM on July 13, 2007

There is no income tax impact to you of making trades within either type of IRA (Roth or traditional).
posted by Dec One at 2:11 PM on July 13, 2007

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