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Transactions 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 Potential tax consequences are only triggered when money is withdrawn from an IRA account altogether.
Key Takeaways
- Sales and purchases made within an IRS are not taxable.
- This rule applies to all investment transactions, regardless of whether you accrue capital gains, dividend payments, or interest income.
- Funds cashed out from an IRA or Roth IRA before age 59½ are typically subject to a 10% early withdrawal fee, with some exceptions.
- Withdrawals after age 59½ from traditional, SEP, SIMPLE, or SARSEP IRAs are subject to ordinary income tax at your current tax rate.
- Withdrawals from a Roth IRA are not subject to income tax since contributions are made with after-tax dollars.
Non-Taxable Transactions
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.
Mutual fund buy and sell orders may result in commissions and fees being charged. The types of fees you can expect will depend on the type of mutual fund you are transacting and the period you hold the fund. These costs are deducted from the account balance but are not considered taxable withdrawals from the account.
Important
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 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 2024 limit on annual contributions to an IRA is $7,000. This limit remains the same for the 2025 tax year. The catch-up contribution for those aged 50 and over is an extra $1,000 (for a total of $8,000 in 2024 and 2025).
Do You Pay Taxes on Capital Gains in a Traditional IRA?
According to the Internal Revenue Service (IRS), “amounts in your traditional IRA (including earnings and gains) are not taxed until you take a distribution (withdrawal) from your IRA.” What’s more, sales and purchases of stocks, bonds, funds, and other securities made within an IRA are not taxable.
How Is a Traditional IRA Taxed When You Make a Withdrawal?
If you take a distribution from a traditional IRA, that amount will be taxed as ordinary income. If you’re under age 59½, you may also have to pay a 10% early withdrawal penalty. Distributions from Roth IRAs are tax-free, however, provided you have had the account for at least five years and you are 59½ or older.
How Can I Avoid Paying a 10% Penalty on a Traditional IRA Withdrawal?
One way is to avoid taking a distribution before you reach the age of 59½. But the IRS makes other exceptions to that rule. A few include being a qualified first-time homebuyer, having a medical emergency, paying for qualified education expenses, and paying for health insurance premiums while unemployed.
The Bottom Line
There are many advantages to saving for retirement in an IRA, including this one—that buying and selling stock in an IRA mutual fund doesn’t incur a tax consequence. Although you may incur commissions and fees on buy and sell orders, they are not considered taxable withdrawals. Only taking a distribution from a traditional IRA is usually a taxable event.
