Can a Roth IRA Be Used to Buy Stocks?

In and of themselves, a Roth individual retirement accounts, or IRAs, are 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 choose other types of investment options including 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.

Understand the Process

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.

Consider the Advantages

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.

Look at the Disadvantages

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​.

Be Aware of Tax Implications

When thinking about using funds in your Roth IRA to buy potential investments, just keep in mind how the IRS considers the growth. Your bottom line in your Roth IRA is not taxed. If the investments in your Roth IRA make a profit, you will be taxed on the profit which is equal to the total in the account minus the initial deposit amount.

Usually the IRS taxes this profit within your tax bracket rate for the year. This is something to think about when moving money around in your Roth IRA.