Rules for Trading Stocks in an IRA Account

by Angie Mohr
Stocks can be traded in most IRA plans.

You have several options when it comes to choosing investments in your individual retirement arrangement account, including stocks, bonds and mutual funds. Trading stocks in your account can provide you with gains over time that are treated favorably for tax purposes. Knowing the rules for stock trading in your IRA can help you make the best choices for your financial situation.

Eligible IRA Accounts

IRA plan custodians have differing rules as to the types of investments and trading they allow in the plans. Before setting up your IRA, ensure that you understand the plan's rules and restrictions. In most plans, you can trade stocks and exchange traded futures (ETFs) on major stock exchanges, such as the New York Stock Exchange and the Toronto Stock Exchange. Some plans allow overseas stock market trading as well. The SEC requires that the brokerage firm handling the trading duties of the plan has you sign a form declaring your level of investment knowledge and your goals for investment before it can give you trading privileges.

Capital Gains and Losses

Buying and selling stocks creates capital gains and losses. In a traditional IRA, these gains and losses grow in the plan with no tax consequences until you withdraw money. You do not have to track these gains and losses for tax purposes as withdrawals are taxed as ordinary income, although tracking your buys and sells helps you know how your investment performance is doing. In a Roth IRA, gains and losses stay in the plan without ever having tax consequences. Both plans give you a better tax treatment of gains and losses than holding stocks in a regular trading account.

IRA Distributions

Once you turn 59 1/2 years old, you can begin to withdraw money from your IRA without penalty. In a traditional IRA, you must begin to make IRS-calculated minimum distributions starting at age 70 1/2. Distributions from an IRA are made up of a mix of your original contributions and the total income, including gains and losses, accumulated in the plan. In a traditional IRA, the sum of the withdrawals for the year are taxed as ordinary income at your marginal tax rate, regardless of the makeup of the withdrawal. In a Roth IRA, withdrawals are completely tax-free. If the stocks were traded in a non-retirement account, you would be taxed on the capital gains in the year they occurred. If the stock had been held less than a year, you would be taxed at your ordinary income tax rate, up to 35 percent. If it was held more than a year, it would be taxed at either a zero rate or 15 percent, depending on your income. Many IRA holders choose to hold stock investments in a Roth IRA to ensure the best tax treatment.

Restricted Stock Trading Activity

The IRS rules for IRAs disallow borrowing from your plan, so this restricts several types of stock market trading, including selling shares short, buying on margin (credit) and selling options naked (not owning the underlying shares). Some brokerage firms further restrict advanced trading, such as futures and options. Others allow this type of trading but require IRA holders to demonstrate they have the knowledge and experience to handle these riskier strategies.

About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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