Tax Consequences In A Traditional IRA

[RetiredAt49]

I've searched the Internet for answers (scary right) but I want to be sure I'm crystal clear...

I have about 80 individual stocks (e.g. Apple, Microsoft, etc.) sitting in a traditional IRA... Long story but I transitioned away from my AUM Wealth Management Company and they had me invested in nearly 80 stocks.

I know in a taxable brokerage account, if I sell things higher than the cost basis I own capital gains and if it's lower then I incur capital losses. However, in a traditional IRA is there any scenario in which I would owe taxes when selling/purchasing individuals stocks or ETF's? I know I can't withdraw funds but I'm only 50 years old so I'm not going to withdraw from this account for a long time.

The Internet claims "in most cases" swapping equities/ETF's does not create taxable events in a traditional IRA but I'm not sure what are the cases that would create taxable events.

 

[SevenUp]

If you create a wash sale by buying and selling the same stock at about the same time inside and outside the IRA, that can have a tax effect.

See Can IRA Transactions Trigger the Wash-Sale Rule? for more.

Otherwise what happens inside the IRA stays inside the IRA and won't affect your taxes.

 

[COcheesehead]

You can be taxed for UBTI activity in an IRA.

 

[donheff]

OP - if all you are doing is reworking your holdings in the IRA (e.g., buying alternate stocks, bonds, or index funds) you have no problem. Wash sale trickery (e.g. selling for a loss in a taxable account while buying the same in an IRA is the primary no no. Not likely to get caught, although I think the new Inflation Reduction Act funds a bunch of additional IRS agents so watch out.

 

[latexman]

You can be taxed for UBTI activity in an IRA.

UBTI?

 

[aja8888]

UBTI?

Partnership income outside of normal business called Unrelated Businesses Tax Income. Usually with a MLP (multi-level partnership). Over $1000 of UBTI is the trigger for paying taxes in an IRA.

 

[COcheesehead]

UBTI?

I never heard of it either, but someone on the Fidelity forum complained that Fido took taxes out of their IRA and was moaning about it only to discover they had invested in something that threw off UBTI. Weird, but it is a way to get taxed on a deferred account.

 

[pb4uski]

OP, if your holdings are publicly traded stocks like Apple, Microsoft, etc you don't need to worry about UBTI.

 

[aja8888]

I never heard of it either, but someone on the Fidelity forum complained that Fido took taxes out of their IRA and was moaning about it only to discover they had invested in something that threw off UBTI. Weird, but it is a way to get taxed on a deferred account.

It's not weird if you hold partnerships (units) in an IRA. I have one, Enterprise Partners (EPD), a pipeline company. I don't have enough units to trigger UBTI tax though.

Rather than a 1099, they give you a K-1 for tax reporting.

 

[aja8888]

OP, if your holdings are publicly traded stocks like Apple, Microsoft, etc you don't need to worry about UBTI.

Remember that partnerships where UBTI is an issue are also publicly traded.

 

[Winemaker]

UBTI in a tax deferred account is generally monitored by the IRA's trustee. I get notices all the time from Fidelity, but the income has never gone above $1000. If it would, the trustee (in my case, Fido) would take it from my tax deferred account, and pay the tax.

 

[pb4uski]

If UBTI was an issue it would also be known to him as an issue for his current 80+ holdings from his former AUM manager.

 

[aja8888]

UBTI in a tax deferred account is generally monitored by the IRA's trustee. I get notices all the time from Fidelity, but the income has never gone above $1000. If it would, the trustee (in my case, Fido) would take it from my tax deferred account, and pay the tax.

Same here, but it's Schwab that handles the Form 940 if taxes are to be paid. But in two decades of MLP's in my IRA, not once did any of my partnerships meet the $1000 UBTI threshold.

 

[corn18]

OP, just watch out for wash sales with stocks held in a taxable account.

One thing to consider: minimizing growth in a tax deferred account. I was tickled pink watching my 401k grow like crazy until I got close to retirement and started looking at taxes. I held bonds in my taxable and Roth accounts as well as my 401k. I got a clue and re-wickered where I held what assets:

401k: maximum fixed income (currently 100% fixed income) to minimize growth and future taxes when I withdraw or convert to Roth

Roth: 100% equities. Maximize growth here because it will never be taxed

Taxable: 100% equities right now to make my 60/40 work out. Maximize growth here over 401k because it will be taxed @ LTCG rates vs. the 401k which will be taxed as ordinary income. This works out great for me because my LTCG rate is 0% and my ordinary income rate is 12%.

Just something to consider.