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Retirement > 401(k)s & IRAs
Trading stocks in your IRA
April 19, 2000: 8:36 a.m. ET

You can avoid capital gains taxes if you shift your activity from taxable account
By Ed Slott
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NEW YORK (CNNfn) - Tax day has come and gone. If investing gave you tax-filing and tax-paying pain, why not change things now for next year with your IRA.
    If you were busy and successful in the stock market in 1999, you paid for it at tax time. Record-keeping and tax-reporting requirements became a nightmare for active traders and their tax preparers.
    Then came the tax bills and of course the increased fees from tax accountants -- like me -- who were tortured with the task of reporting all your stock trading, with missing cost data and other required information. Did anyone really know how to accurately report the Airtouch-Vodafone exchange?
    graphicInvestors who bought and sold stocks within the year were hit with higher taxes than those investors who held on for the long term. Long-term capital gains rates are capped at 20 percent for those who hold investments for more than a year before selling. Hold for one year or less and you have a short-term gain. The tax rate for short-term gains is your regular tax rates, known in tax parlance as "ordinary" income tax rates.
    Here's how to avoid the same problems next April:
    If you trade in your IRA instead of your taxable account, you'll be relieved of both the tax-reporting and tax-paying problems. If you are a real mess when it comes to keeping track of your stock trading, an IRA is perfect for you. Gains or losses in an IRA are not reportable, so you don't need any official records of stock buys and sells in your IRA. You should want to keep track of them anyway for your own portfolio management, but the IRS does not care what happens in your IRA as far as stock sales go, because these transactions have no current tax effect.
    If you are a typical short-term trader, you are better off trading in your IRA. Outside of your IRA, short-term gains are taxed at ordinary income tax rates, but inside your IRA gains are all tax-deferred. At retirement, all distributions from your IRA will be taxable at ordinary tax rates -- but that's a ways off, and you would have paid that rate anyway, so it won't cost you any more than you are paying now. Also, you only pay tax on distributions, so most gains can enjoy tax-deferred status.
    Now you've solved both of your tax headaches. Next year at tax time, you won't have to suffer with Schedule D reporting of stock transactions and you won't owe tax on any gains within your IRA.
    

    
Ed Slott's irahelp.com

    

    
Even better. Use your Roth IRA

    Consider trading in your Roth IRA instead of your traditional IRA. Gains in your Roth IRA also do not have to be reported and they will never be taxed. In order to receive tax-free status you must hold your Roth IRA for 5 years and until you reach 59-1/2 years old. You also never have to withdraw from your Roth IRA at 70-1/2, as you are required to do in your traditional IRA. If you never withdraw your stock gains in your Roth IRA while you are living, your beneficiaries will also be able to withdraw from your Roth and never pay graphicincome tax on those withdrawals.
    Even if you are a long-term investor, and would only pay at a top capital gains rate of 20 percent, the Roth IRA is still a better deal. After all, 0 percent in taxes beats 20 percent any day. If you need to withdraw funds from the Roth IRA, withdrawals of contributions will always be tax and penalty free.
    
IRA drawbacks

    Keep in mind: nothing is perfect. There is a downside. Your IRA is for your retirement and you should not be gambling or wildly speculating with your IRA funds. If you suffer losses within your IRA, you lose two ways. You will have lost your retirement savings and you will not be able to deduct those stock losses in your IRA. Within an IRA it works both ways. Both gains and losses are not recognized. If you have gains, they are not taxable, but if you incur losses you cannot deduct them. Be careful investing within your IRA.
    With that said, start eliminating next year's tax headaches now, by shifting your stock trading to your IRA or Roth IRA and leave Uncle Sam out of your stock profits. You'll not only simplify your tax filing, but you'll also make it a little easier on your poor tired tax preparer. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.