Transactions that are made within an individual retirement account (IRA) are not taxable. Stocks, funds, and other securities can be purchased and sold within an IRA account without triggering any consequences. Potential tax consequences are only triggered when money is withdrawn from an IRA account altogether.
- Sales and purchases—of stocks, bonds, funds, ETFs, or any other securities—that are made within an individual retirement account are not taxable.
- This rule applies to all investment transactions, regardless of whether the recipient has accrued capital gains, dividend payments, or interest income.
- There are, however, often brokerage commissions and fees for buy and sell orders within the IRA. Nonetheless, the orders themselves are not taxable.
- Funds an investor cashes out from an IRA or Roth IRA before reaching age 59½ are typically subject to a 10% early withdrawal fee, with some exceptions for medical emergencies and a few other issues.
- Funds that are withdrawn after age 59½ from traditional, SEP, SIMPLE, or SARSEP IRAs are subject to ordinary income tax at the beneficiary's current tax rate.
- Funds that are withdrawn from a Roth IRA are not subject to income tax (provided that certain qualifications are met) since Roth IRAs are funded with after-tax money in the first place.
Transactions that are not taxable in an IRA account include purchases, exchanges between mutual funds, buying and selling stocks, dividend reinvestments, and capital gain distributions. Mutual fund exchanges are not taxable as long as the money is being exchanged into an account registered as an IRA.
Dividend and capital gains distributions made by funds and stocks result from the initial investment and are not considered contributions or taxable events. In the case of brokerage accounts, transactions may clear through a sweep account but are not taxable. Buy and sell orders, however, may still result in commissions and fees. These costs are deducted from the account balance but are not considered taxable withdrawals from the account.
As long as the money stays in your IRA, there are no tax consequences; this applies to capital gains, dividend payments, and interest income.
Tax Consequences for IRA and Roth IRA Accounts
Transactions within an IRA account are not taxable, but withdrawals from an IRA are usually taxable, depending on the investor's specific circumstances. Contributions to a traditional IRA account may be tax-deductible, but any withdrawals made from the account are taxed as ordinary income. Non-deductible contributions are not taxable upon withdrawal.
In a Roth IRA, contributions are made with after-tax dollars, but withdrawals are tax-free provided that certain qualifications are met. Non-qualified distributions from either an IRA or Roth IRA may be subject to taxes and a 10% early withdrawal penalty and applies to those who take money out of their IRA or Roth IRA before the age of 59½.
However, there are certain circumstances where early withdrawals are not subject to that fee, including medical emergencies. For distributions from Roth IRAs, the original contribution will not be taxed, even if it's non-qualified, since it had already been taxed as ordinary income. Only the gains portion of the non-qualified Roth distribution would be subject to taxes and penalties.
The 2022 limit on annual contributions to an IRA is $6,000. This limit increases to $6,500 for tax year 2023 to account for inflation. The so-called catch-up contribution for those aged 50 and over, is an extra $1,000 (for a total of $6,500 in 2022 and $7,500 in 2023).