In and of itself, a Roth individual retirement account, or IRA, is not an investment. Rather, it exists as a type of account that consists of various types of investments that can include stocks and other assets. For instance, you can also include bonds, mutual funds and certificates of deposit in your IRA. Some Roth IRA owners might find that owning stocks in their account best serves their investment goals. If you fall into this group, consider several points before settling on a strategy.
The process of buying stocks for a Roth IRA does not differ from doing so in a traditional brokerage account. In fact, when you open an investment account with a brokerage, bank or other financial institution, the firm will ask you how you want the account classified. Generally, Roth IRA will be among the choices. From there, you can proceed to buy and sell stocks as you would in any other account.
Within the basic framework of buying and selling stocks in a Roth IRA, distinct advantages and disadvantages exist relative to non-IRAs and non-Roth IRAs. The biggest advantage to owning stocks in any IRA is that you can buy them and sell them for capital gains and collect dividend income without having to pay income tax. You typically will not pay tax on Roth withdrawals, including earnings generated by stocks, if you wait until you turn 59 1/2 and have held your Roth account for at least five years before accessing your cash. Refer to Internal Revenue Service Publication 590 to view exceptions to this rule of thumb.
While most investors enjoy the idea of tax-deferred status and tax-free withdrawals from Roth IRAs, you might end up dealing with a trade-off. Supposed you buy a stock that turns into a considerable winner. In a taxable account, you might be tempted to sell the stock, pay your capital gains tax and use the money for some purpose. You can do this in a Roth IRA, too. But if you withdraw the proceeds early, the IRS will levy a 10-percent tax penalty on your earnings, in addition to any regular tax due, assuming you do not qualify for an exemption and you have not hit age 59 1/2.
The IRS never taxes original contributions that you remove from a Roth IRA. For instance, assume you contributed $10,000 to a Roth IRA and purchased $10,000 worth of a stock with that money. Imagine that stock did well and your $10,000 investment turned into $15,000. If you withdrew $12,000 from the account, the IRS would not tax the first $10,000, but you would be on the hook for regular income tax on the $2,000 in earnings and, potentially, depending on your situation, the additional 10-percent penalty for early withdrawal.
- Internal Revenue Service: Retirement Plans FAQs regarding IRAs
- Congressional Research Service. "Traditional and Roth Individual Retirement Accounts (IRAs): A Primer," Page 9. Accessed July 24, 2020.
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed July 24, 2020.
- Internal Revenue Service. "2021 Limitations Adjusted as Provided in Section 415(d), etc." Accessed October 30, 2020.
- Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2019." Accessed July 24, 2020.
- Internal Revenue Service. "Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs)." Accessed July 24, 2020.
- Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs." Accessed July 24, 2020.
- Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Accessed October 30, 2020.
- Federal Deposit Insurance Corporation. "Certain Retirement Accounts," Page 1. Accessed July 24, 2020.
- Federal Deposit Insurance Corporation. "How Are My Deposit Accounts Insured by the FDIC?" Accessed July 24, 2020.
- Internal Revenue Service. "Retirement Savings Contributions Credit (Saver’s Credit)." Accessed July 24, 2020.
- Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed July 24, 2020.
- Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed July 24, 2020.
- 116th Congress, 1st Session. "H.R.1865 - Further Consolidated Appropriations Act, 2020." Accessed July 24, 2020.
- 116th Congress, 1st Session. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019." Accessed July 24, 2020.
As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.