I'm just getting in to stock trading, and have a couple questions.

I am looking for ways to defer taxes on capital gains for stock investing. I already have a Roth IRA that I max out every year. I also have a 401(k) through my job. I think I want to open a Traditional IRA and utilize that to do my stock trading. The answer to my questions will help determine how much I will contribute to my Roth vs my Traditional.

1. How does the buying and selling of stocks work with a Traditional IRA? Lets say I have $1,000 in my Zecco account, and I buy GOOG stock with all of it. Two months later it is now worth $1,200 and I decide to sell. Do I have to put that entire $1,200 into the Traditional IRA, or can I only put the $200 in gains in the IRA, thus avoiding capital gains tax (realizing I have to pay tax on the money when I take it out later in life), and put the remaining $1,000 in capital back into my Zecco account to keep as cash for other stock investments later?

2. Considering the Traditional IRA, the money gets taxed based on your income when you retire. Lets say I make $80,000 a year at the age of 62 and I want to retire. It is financially feasible for me to continue working for less money, so I take a part time job and make $30,000 until I am 63. I then officially retire and begin drawing money out of my Traditional IRA. Does the money I take out get taxed at the tax rate for my final working income of $30,000, or will it still defer to my $80,000 job? Do I have to work a particular job/salary for X number of years before thats my official salary used at retirement?

Thank you in advance,

Oskizzle

SUMMARY (if you dont want to read the long explanation):

Your contribution must come from EARNED INCOME. Investment income does NOT count as earned income.

Withdrawals are subject to INCOME TAX. Meaning: your withdrawals would just become part of your income. So add the withdrawals with your Earned Income to get Gross Income. Then youll calculate your Taxable Income, then Tax Liability just as you would now.

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FULL:
Hello,

I'm glad to hear that you've been already maximizing your contributions! Buy me a dinner when you turn 59.5, will you?

Anyhow, let me first point out an error. You can NOT contribute your earnings from investment into your IRA Traditional or even to IRA Roth. It MUST be from an actual work, it HAS to be EARNED INCOME. Here's a definition of earned income:" Earned income is income received for personal services rendered. Passive income, such as income from an investment, is not considered earned income for purposes of making an IRA contribution. (http://www.harborfunds.com/

So, in order words, your first example of putting your INVESTMENT EARNINGS into your traditional account, doesn't work. BUT, you said you have 401k, meaning you do have a job. Which means you can put the money from work into your IRA account(s). But, give and take for math purposes, whether or not the money comes from your capital earning or your payroll, it wouldn't make a difference. Unless, you're earned income is less than the contribution. Then the maximum contribution possible will be your earned income.

And it does NOT matter (meaning the IRS doesnt care) if you put $200, $1000, $1200, $1, etc Just keep it below the contribution limit and your earned income.

Because withdrawals are subject to INCOME TAX, when you do decide to retire (Make sure its after 59.5!), your withdrawals from your IRA Traditional will just be part of your income. So, youll be filing your taxes and paying taxes just like as if the withdrawals were extra income.

So, in order to calculate how much tax youll pay, figure out your Earned Income from your work and then add the withdrawals from your IRA Traditional to get your Gross Income. From that, youll figure out your Adjusted Gross Income, then Taxable Income then Tax Liability.

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I hope I have answered both your questions. Let me know if you have further questions.

(If there are spelling or grammar mistakes, I do apologize, its 1am and I need my sleep!)


-James R. Daniel

I am also looking into a zecco IRA.

If I understand your question correctly, you are planning to keep money in your individual account and move capital gains into an IRA account. I believe you need to have the $1000 in your IRA account before you buy GOOG. When GOOG goes up, your IRA account will go from $1000 to $1200 automatically. If you have the $1000 in your individual zecco account, you will be taxed on the $200 gain when you sell.

If you want to avoid paying $4.50 for the trades, have $2500 in your IRA account also.

For you second question, you probably want to consult an accountant. I would think the earned income from the current tax year when you retire applies. Since it affects your decisions now, a CPA's opinion would be invaluable IMO.

James,

Great explanation. I really appreciate the definitions, and the links!

But, it does lead to more questions!

So I cannot just put my earnings from stock trading into an IRA (Roth or Traditional). I must fund the IRA with contributions from my current job, then I'll be able to trade stocks using the IRA funds.

Let's walk through a hypothetical situation. I work my tail off at my job and put $1,000 into a newly opened Zecco IRA account (Roth or Traditional doesn't matter for my situation - I am aware of the differences between the two). I use that $1,000 to invest in GOOG. Two months later I sell the GOOG stock and have a gain of $200, so my IRA account is up to $1200. Since the money is in an IRA I do not have to pay capital gains tax on it, correct? Additionally, since my max contribution is $5,000 a year, I can plug $3,800 into my Roth IRA and thus meet my max, correct?

Now hypothetical situation #2. I have $40,000 to invest in GOOG. It goes up by the same 20%, so two months after buying it I sell it and its worth $48,000. I thus have a capital gain of $8,000. There's no way to get around paying taxes on at least some of that - because $8,000 is over my contribution limit of $5,000. So I will have to pay capital gains tax on at lease $3,000 of that. Is that correct?

Thank you much!

In your first example you make a contribution of $1,000. Therefore you may make additional contributions of $4,000 if the maximum contribution limit is $5,000. The gains you make in the IRA account have absolutely nothing to do with your contribution.

In your second example you still have not abandoned the idea that gains from the sale of securities are available as IRA contributions. They aren't. Earned income is the source of IRA contributions. If you are saying that the amount you gained on the trade is now available to you to make an IRA contribution, then you are correct. However, you could still make the contribution from another source. Therefore the IRA contribution doesn't really serve to shelter the capital gain, except to the extent that you would be unable to make the contribution without the funds from the sale.

Billy,

You are correct, I have not abandoned the idea about gains available for IRA contributions. I'm just confused because I've read a book that suggests using IRA's as a tax shelter for gains (Rule #1, by Phil Town). I'm starting to think I was delirious when I read that now!

Is there any way at all to shelter any amount of gains from capital gains tax, utilizing an IRA or some other form of investment?

From the way this conversation is going, it doesn't seem possible. Could someone run me through an example if it is?

An IRA is a great tax shelter. All the gains are either tax-exempt or tax deferred, depending on the IRA type. You are limited on your yearly contribution of $5000 per year at the present.

Here's an example:

2008 - contribute $5000 to your newly opened IRA
2009-15 - contribute $5000 each year (limit will probably change, depends on who is in White House and Congress)

Now you have $40,000 in your IRA account. You buy Google. It goes up to $48,000. You sell Google. Your $8,000 gain is in an IRA so it is all tax sheltered.

Of course, you could have been trading since you first funded the account also. Sound good? :)

Thank you Heather! Thats clears up my confusion.

With this knowledge from everyone, here's my plan of attack:

- I have a current Roth IRA that I max out every year, as well as a 401(k) through my employer.
- Open a second IRA (have yet to determine if it will be a Roth or Traditional).
- Put $4,000 in my original Roth IRA this year.
- Put $1,000 in the new IRA (thus maxing out my contributions for the year)
- Use the $1,000 from the new IRA as my investment pool to trade stocks, putting all my gains/losses there and utilizing any additional gains as future stock investment capital.

My reasoning here is that I have read opinions that say it is not a great idea to use an IRA as the means of trading stocks. When an individual makes a mistake and loses money, they are messing up their entire retirement.

But, if I have two IRA's, and leave my major Roth IRA alone, I minimize the risk to my entire IRA retirement investment when I screw up trading stocks with the IRA.

Anyone have an opinion on this idea?

SUMMARY(if you dont want to read the long explanation):

No reason for multiple IRA Roth or Traditional. Just 1 Roth, 1 Traditional. Reason being, read full.

Put the $5,000 into 1 account, and just invest $1000 from it in stocks. You are in complete control of where you invest and also HOW MUCH you invest.

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FULL:
Hello again,

I expect two dinners now. Lunch then dinner works also! Haha

In GENERAL case, you would NOT have more than 1 Roth and 1 Traditional. Only reason to have multiple IRA accounts, is if you want to take advantage of other factors; such as (and not limited to): fees for different brokers are different, some brokers are better than the other in certain areas; some features of some brokers are better.

Such as, Zecco gives free stock trades, but their options fee is not the cheapest. There are other brokers who offer cheaper fees. So, if you want to do some stock trades and options trades with your IRA account, you would have 1 account in Zecco and the other in a different broker. You would stock investment through Zecco and options trades with the other account. This will save some cash (little, but can make a difference).

I have to remind you that, the TOTAL CONTRIBUTION to ALL your IRA accounts is limited to the annual maximum contribution. Its not per account.

So, it doesnt make sense for you to have more than 1 IRA account in just one broker. Unless its 1 TRADITIONAL and 1 ROTH. So, thats 2 IRA accounts.

Having multiple IRA accounts does NOT reduce risks involved in investing. IRA is only a tax shelter.

So, put the $5,000 into 1 account, and just invest $1000 from it in stocks. You are in complete control of where you invest and also HOW MUCH you invest. So if you only invest $1000 in stocks, only your $1000 will be at risk.

The question of how much you should put into your Traditional or Roth account will depend on your current salary, your future salary, current tax schedule and future tax schedule.

Your investment decisions should be based on these variables: how much you are investing, how old you are, in how many years you'll retire, your earning income, what your investment goals are, etc

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-James R. Daniel

I will be opening two IRA's because I want to keep my other IRA excluded from my Zecco activities. I think that will just help me keep things straight.

James, thank you for the additional insight. I'm new to Zecco, and having people respond with great input and a sincere desire to help is great.

Just to go into a little more detail though, I want to run through another hypothetical situation again.

I open an IRA with Zecco. I put $1,000 into it (realizing that now I can only invest $4,000 into my other IRA).

I invest in one or more stocks - we'll say one for simplicities sake - and we'll stick w/ GOOG. I ride GOOG for 2 months, then want out. I have to keep my $1,000 in the Zecco IRA invested in something (or suffer penalties for early withdrawal), so whats the process here? Do I sell all my GOOG stock, then immediately purchase an extremely low risk item to "hold" my money until I find another stock to invest in? Or does Zecco have some nifty way of saying "sell this GOOG stock and place the proceeds into this XXX fund/bond/whatever"?

I have no experience w/ using an IRA for stock purchasing (duh, right?!!) My current IRA is a target fund, so I just put the money in and its invested in high risk stocks (I'm 24 right now) and then moves to lower risk as I get closer to my hopeful retirement - so I'm very in-the-dark on this topic.

Thanks again everyone!

SUMMARY(if you dont want to read the long explanation):
Whatever floats your boat or let you get to have a sound sleep at night is the best choice.
You are on your own in deciding when to sell and what to buy. If you just sell and not do anything else, the money will just sit in your account. It wont grow, nor will it diminish (ignoring inflation).

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FULL:
Dinner count: 3
Unlike the target fund, Zecco does NOT manage the fund for you. You are all on your own. You have to decide what when to buy and what when to sell.
When you sell, the money will be just placed into your account.

And by the way, you MUST have $2500 of total equity in your account in order to get the free trades. So, a $1000 wont be enough for you to qualify.

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Please think things over very carefully before you make any investment decisions. Generally, I would never recommend in holding just 1 or 2 stocks. ESPECIALLY just GOOG. It has much vicissitude in current situation especially with MSFT trying to buy YHOO. Please be careful.


-James R. Daniel