IRA Stock Trading Rules

Overview

Individual Retirement Arrangement (IRA) owners have flexible options when it comes to the type of investments held under the IRA tax-deferred umbrella. A popular selection is stock investments that provide the potential for substantial growth over time. Understanding the rules about trading stocks in an IRA helps investors maximize gains and, in some cases, minimize losses as well.

Capital gains do not apply to either a traditional IRA nor to a Roth IRA, as long as the money and equities remain in the IRA structure. An investor may buy or sell as much and as often as he wants without having to calculate whether the transaction is a short-term gain (selling the stock before one year) or a long-term gain. Short-term gains are taxed at as high as 35 percent in ordinary non-IRA accounts based on 2010 Internal Revenue Service (IRS) regulations. The savings by the IRA on gains is ideal for stock traders looking to maximize profits based on market trends and quick transactions.

Normal distributions are taken from an IRA after age 59 1/2. When distributions are taken from a traditional IRA, they are added to ordinary income. This means that the growth of the stocks, when liquidated, is only taxed for the amount taken as a distribution and at the individual's existing tax rate. Since most retirees are in a lower tax bracket once they retire, the tax savings is greater when income tax is paid in retirement compared to working years. Roth IRAs grow tax-free as long as the account is held for at least five years and until age 59 1/2 before distributions are taken. This means Roth distributions are not taxed at all, giving the growth of the stock the highest earnings benefits without taxable consequences. Taking assets out of a traditional or Roth IRA before the age or time requirements have been met, adds a 10 percent penalty tax on the distribution.

Not everyone qualifies to take a loss on an IRA, but it is possible. Since the money is growing deferred with no capital gains, there is only one condition under which the IRS allows you to claim a loss on stocks traded within an IRA. If you liquidate your IRA completely and receive less in the distribution than the amount you contributed over time, you may claim a capital loss using Schedule A on IRS Form 1040. This is a miscellaneous deduction that may not exceed two percent of your adjusted gross income. If an IRA owner owns more than one IRA, the loss must be on the aggregate value of the IRAs, not just the IRA where the loss is realized.