Imagine that you're worried about the economy and as a result, you want to move your individual retirement account (IRA) funds from stocks and into bonds to cash. Will you be taxed for doing that?
The short answer is, if you move money out of stocks and into safer assets such as a money market fund, in your IRA, you won't be taxed immediately on any gains, since it will count as a reallocation or rebalancing to your portfolio. You may, however, be subject to taxation upon withdrawal when you are retired.
Key Takeaways
- You can change your individual retirement account (IRA) holdings from stocks and bonds to cash, and vice versa, without being taxed or penalized.
- The act of switching assets is called portfolio rebalancing.
- There can be fees and costs related to portfolio rebalancing, including transaction fees.
- IRA funds can be taxed if you take early withdrawals, however.
Initial Considerations
You'll incur taxes only if you take the money from your IRA via withdrawals or distributions. There might be transaction fees or other related costs when making allocation changes. These costs will differ from one IRA custodian to another.
If you intend to sell and buy stocks frequently, doing it inside an IRA offers tax advantages. A large profit on a stock you've owned for just a little while gets taxed at the short-term capital gains rate, but if it's inside an IRA, you're off the hook. Instead, you’ll get to avoid paying taxes on profits until you’re older. The downside is that you can't take a tax write-off for bad picks, no matter how big your losses are.
IRA Portfolio Rebalancing
Rebalancing your IRA is the act of switching assets or securities you own (i.e., moving from stocks to cash and vice versa). Rebalancing is not taxable when investments are held in an IRA—but is often taxable when held in a taxable brokerage account.
IRAs are a great way to save on taxes. Traditional IRAs allow for up-front tax deductions, allowing you to defer taxes until making withdrawals during retirement. Roth IRAs allow investors to contribute after-tax dollars in exchange for tax-free distributions during retirement.
IRA Taxes
Although you shouldn’t incur any taxes until you take distributions or withdrawals, there are various fees you might incur. For starters, you can get a penalty fee if you contribute more than the limits. As well, if your IRA earns more than $1,000 in unrelated business taxable income (UBTI), then you must pay taxes on that income.
Meanwhile, you can also be taxed on investments made via self-directed IRAs. These IRAs prohibit investments in collectibles. Investing in these assets will be considered a distribution and subject to a penalty.
If you buy or sell securities in a Roth IRA, you will never be subject to taxation since a Roth has already been funded with after-tax dollars and grows tax-exempt.
IRA Withdrawals
Early withdrawals from your IRA, before age 59½, are not only taxable at ordinary income rates, but will also face a 10% penalty. You can make early withdrawals and still pay ordinary tax rates but avoid the penalty if the money is used for certain purposes. Examples include using the money for first-time home purchases and paying unreimbursed medical expenses.
Meanwhile, there are required minimum distributions (RMDs). Distributions from a traditional IRA, and other certain IRAs, must start when you are 73 if you were born between 1951 and 1959, or 75 if you were born in 1960 or after. If an investor fails to take RMDs, they will be charged a 50% excise tax on the amount required to be taken.
What Types of Investments Are Not Allowed in an IRA?
IRAs are quite flexible retirement accounts, and you can invest in a wide range of assets such as stocks, ETFs, bonds, mutual funds, and types of real estate. There are, however, certain restricted assets that cannot go into an IRA. These include life insurance policies, unhedged short derivatives positions, collectibles, personal property, a primary residence, and certain precious metals.
Will I Owe Taxes When I Make a Withdrawal From an IRA During Retirement?
Yes. Traditional IRAs use pre-tax dollars, giving you an income tax deduction in the year of the contribution. This creates a deferred tax liability. When you make a withdrawal later, you will be subject to pay that deferred income tax, but at the tax bracket you are in when you make the withdrawal. Note that a Roth IRA uses after-tax dollars and does not have deferred tax liability.
Does Trading in an IRA Create a Taxable Event?
No. IRAs are tax-advantaged retirement accounts and would not be subject to a capital gains tax exposure from trading within it; however, all contributions and any gains will eventually be taxed at your tax bracket when you make the withdrawal. Note that at age 73 or 75, depending on the year you were born, the IRS requires you to take required minimum distributions (RMDs), and these would also be taxed at your income tax bracket at that time.
The Bottom Line
There are many considerations to make when shifting money from stocks to bonds in your IRA, such as fees you may have to pay. While you won't have to pay taxes upfront for this re-balancing, you may have to pay them when you withdraw the money later. The amount of taxes you pay, or if you pay any at all, can vary depending on the type of IRA you have as well as what age you are when you make the withdrawals, and how much income you are earning at that time.
FAQs
Will I Be Taxed if I Switch My IRA From Stocks and Bonds To Cash? As long as the money stays in your IRA, you can move it around tax-free.
Can I move my IRA to a cash account? ›
The “individual” part of IRA means that the account is fully yours, unlike for instance a 401(k) plan you enter into with your employer. Because you have total control, you can transfer your IRA balance to a savings account if you like.
Should I move my IRA to cash? ›
Financial advisors typically offer an emphatic no. Some, though, offer a caveat. “If you have all the money you'll ever need, and don't need to take on any risk to accomplish all of your goals for the rest of your life, sure, move to cash,” said certified financial planner David Robbins.
How do I avoid capital gains tax on IRA withdrawal? ›
You can withdraw earnings without penalties or taxes as long as you're 59½ or older and have had a Roth IRA account for at least five years. 5 Although it can be hard to predict, a Roth IRA may be a good choice if you think you will be in a higher tax bracket when you retire.
Should I move my IRA to bonds? ›
Bonds may be a good idea for your individual retirement account (IRA) if you are looking to invest in a more conservative way, such as if you're nearing retirement age. While stocks perform better, they're riskier. A diverse portfolio made up of both stocks and bonds is a good strategy.
Do you pay taxes when you sell stock in IRA? ›
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.
How can I cash my IRA without penalties? ›
Here are the ways to take penalty-free withdrawals from your IRA or 401(k)
- Unreimbursed medical bills. ...
- Disability. ...
- Health insurance premiums. ...
- Death. ...
- If you owe the IRS. ...
- First-time homebuyers. ...
- Higher education expenses. ...
- For income purposes.
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
Do you pay taxes when you cash in an IRA? ›
Money deposited in a traditional IRA is treated differently from money in a Roth. If it's a traditional IRA, SEP IRA, Simple IRA, or SARSEP IRA, you will owe taxes at your current tax rate on the amount you withdraw. For example, if you are in the 22% tax bracket, your withdrawal will be taxed at 22%.
What is the best way to move an IRA? ›
How Direct IRA Transfers Work. If you want to move your individual retirement account (IRA) balance from one provider to another, simply call the current provider and request a “trustee-to-trustee” transfer. This moves money directly from one financial institution to another, and it won't trigger taxes.
Tax reporting when making non-deductible IRA contributions
This is done using Form 8606. If you don't report, track, and file the form, you'll lose the ability to shield part of your IRA withdrawal from tax when you take the money out. In another words: you'll pay federal income tax on the same dollar twice.
When can you withdraw from IRA without paying taxes? ›
Delay IRA Withdrawals Until Age 59 1/2
You can avoid the early withdrawal penalty by waiting until at least age 59 1/2 to start taking distributions from your IRA. Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10% penalty.
How much is capital gains tax on IRA withdrawal? ›
Key Takeaways. A Roth IRA is never subject to short-term or long-term capital gains taxes. Because a Roth IRA is funded with after-tax dollars, you can withdraw your contributions tax free and penalty free at any time.
Should I move money out of stocks now? ›
Moving your portfolio from stocks to cash is an understandable instinct when savings rates are high and there are concerns about a possible recession. But it's important to remember that stock market investments are part of your long-term plan, and selling could have tax implications.
How many times a year can I withdraw from my IRA? ›
There is no limit on the number of times a traditional IRA can be withdrawn in a year, but it's essential to consider the tax implications of each withdrawal.
What happens to bonds when stock market crashes? ›
So interest rates fall, bond prices rise - vice versa. And in a recession - you know, when the stock market is usually crashing - the Fed will be anxiously cutting interest rates to boost the economy - you know? - to stem that crash. So in this situation, bond prices would tend to go up.
Should I move my retirement to cash? ›
Can You Stop Your 401k From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, that are safe but provide little to no return. This, however, is not often advised (unless you are already nearing retirement).
Can you move IRA from bank to bank? ›
How Direct IRA Transfers Work. If you want to move your individual retirement account (IRA) balance from one provider to another, simply call the current provider and request a “trustee-to-trustee” transfer. This moves money directly from one financial institution to another, and it won't trigger taxes.
How much of your IRA should be in cash? ›
Cash and cash equivalents can provide liquidity, portfolio stability and emergency funds. Cash equivalent vehicles include savings, checking and money market accounts, and short-term investments. A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio.
