How are you taxed after selling a mutual fund in a Roth IRA?

A:Once money is invested into an individual retirement account (IRA) or a Roth IRA, there are no tax consequences for trading securities within the account as long as the money remains in the same account. With Roth IRAs specifically, contributions are taxed at the holder’s current ordinary income rate before the deposit is made. Once the money is invested in the account, capital gains and income are not taxed. Distributions from Roth IRAs are not taxed once they are withdrawn from the account, either. Those investing in various mutual funds, stocks and other securities often wonder about the tax consequences of trading within their accounts, as they may want to switch investments but fear owing money.

Suppose a mutual fund in a Roth IRA account has grown to $100,000 and is sold. Due to the sale event, the mutual fund realizes a long-term capital gain of $20,000. No tax liability is generated, and the full $100,000 can be invested in another security or left in cash. This holds true for traditional IRAs as well, though distributions from these accounts are taxed at the holder’s ordinary income tax rate. If this example sale occurred in an individual brokerage account, the $20,000 long-term capital gain would be subject to the investor’s long-term capital gains tax rate. If that rate were 15%, then a tax liability of $3,000 would be due and the investor would have the remaining $97,000 to invest in other securities.

A:Once money is invested into an individual retirement account (IRA) or a Roth IRA, there are no tax consequences for trading securities within the account as long as the money remains in the same account. With Roth IRAs specifically, contributions are taxed at the holder’s current ordinary income rate before the deposit is made. Once the money is invested in the account, capital gains and income are not taxed. Distributions from Roth IRAs are not taxed once they are withdrawn from the account, either. Those investing in various mutual funds, stocks and other securities often wonder about the tax consequences of trading within their accounts, as they may want to switch investments but fear owing money.

Suppose a mutual fund in a Roth IRA account has grown to $100,000 and is sold. Due to the sale event, the mutual fund realizes a long-term capital gain of $20,000. No tax liability is generated, and the full $100,000 can be invested in another security or left in cash. This holds true for traditional IRAs as well, though distributions from these accounts are taxed at the holder’s ordinary income tax rate. If this example sale occurred in an individual brokerage account, the $20,000 long-term capital gain would be subject to the investor’s long-term capital gains tax rate. If that rate were 15%, then a tax liability of $3,000 would be due and the investor would have the remaining $97,000 to invest in other securities.

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