Question about IRAs and stock investment

Phill · Member

Hello,

Is there any law that says that I can't invest IRAs into the
stock market? If I can, then how does taxes work for this
scenario? I know you are supposed to pay 20% for the
long-term capital gains and the normal rate for the
short-term. Am I supposed to keep track of every details,
so that when I am finally ready to take out $$ (say, 30
years from now) from IRAs, I can correctly determine the tax
rates? (sounds crazy...)

Thank you.

TaxService · Member

Whatever happens within the IRA remains within the IRA. Your
only accounting has to do with what you put in (deductible
and non-deductible contributions) and distributions.. There
is no accounting, although you may want to track them, for
you to do regarding gains and losses within the IRA.

"Jack" - John H. Fisher - TaxServ...@aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Stussy · Member

No. IRA's can be invested in the "stock market," but not
all securities of the market are necessarily available to
them. Dividend-paying stocks are popular.

As for how the earnings are taxed, you're correct - your
question sounds crazy - because it's wrong. All withdrawls
from an IRA (or the appropriate prorated portion if one has
non-deducted contributions into the IRA) are taxed as
ordinary income.

Leigh · Member

Stock investments within IRAs do not incur capital gains
taxes on investments. The downside is that you also cannot
take capital losses but over the longhaul you're more likely
to have gains than losses (hopefully). There's very little
you have to track with IRA investments in terms of cost
basis and reinvestment of dividends unless you want to do it
to evaluate your gains from an investment performance
standpoint.

Leigh in raLeigh

R & M · Member

Neither the dividends or the capital gains are taxes while
they are in the IRA - that is part of what makes them a
powerful way to save for retirement.

For example - if you had just a regular bank account with
enough money to pay you $100 interest during the year, and
you were in the 28% bracket - you would have to pay $28 in
tax on it. If you actually paid the tax out of that account
the amount you would be earning interest on is only
increased by the $72. If it were in an IRA, the
interest would not be taxed so that in the next year you
would be earning interest on the full $100.

The good news is that you don't pay tax now. The bad news
would be that you also cannot claim any capital losses
either. (Except for some very very special circumstances
and not until all money has been withdrawn from IRAs) That
means the stock market is good place for long term money,
but an IRA is usually not a good place to play with highly
risky stocks.

Romano · Member

You may invest your IRA in the stockmarket.
In fact, I encourage people to do so in some cases.

There is no capital gains or losses with IRAs. All you need
to do is keep track of your basis in the (traditional) IRA
so you know what is taxable (as ordinary income) and what
isn't when you take a distribution.

In my opinion, determining IRA basis for federal and state
tax purposes will be the most problematic area in taxes as
more and more people establish and eventually withdraw money
from their IRAs. My suggestion is that during the summer
months you spend a few hours yourself or with the help of a
CPA or other tax pro to determine your IRA basis and learn
how to keep track of your basis from then. Not doing this
could cost you hundreds of dollars or even tens of thousands
of dollars in taxes you may not have to pay.

TABtrader · Member

Aside from paying tax on the $2,000 this is correct.
Remember that your brokerage fees come out of the IRA
contribution. While the tax law part may sound too good
to be true, from what I've read, the anticipated result
of the day trading may also be too good to be true.
Good luck!

R & M · Member

For the purposes of basis in an IRA - isn't the amount that
you contributed to the IRA that has not been taxed the
basis?

For traditional IRAs most don't have any basis as more
people tend not to contribute if they can't get any current
tax benefit from it. For those who have put nondeductible
money into a traditional IRA, they should have been filing
form 8606 each year and hopefully have kept them. For my
clients who do this I make an extra copy of the 8606 and
have instructed them to keep all of them in one file. Since
those are also the folks who are more likely to roll to a
Roth, I really hope they have heeded my aadvice.

The gains and losses of the stocks will have nothing to do
with the IRA basis.

Bae · Member

Well, day-trading is a bit of an extreme case, but I play
about 1/4 of my portfolio in internet stocks, trading them
several times per week. Roth IRA sounds perfect for this,
although I'd liked it more if the ceiling was higher than
$2k per year... Smile