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Home >> Stock Forums >> roth's tax free earnings means trade away?

roth's tax free earnings means trade away?

andersonbd1 said: "brand new to the forums... Please let me know if there's anything I'm overlooking with this post. I spent some time searching and didn't find an answer to my question specifically. I have roth ira's (my wife and I - both 26 years old) and an unsheltered (correct term?) account with Scottrade. I read "A random walk down wall street" a few years ago and concluded that our best strategy is to be as risky as we feel comfortable. I've been doing that with the ETF's I buy. So far I've been taking the buy and hold approach. I want to start getting into options and have a couple of questions about taxes. 1. Any earnings we make in our unsheltered account (assuming less than 1 year investment) is taxed as ordinary income? 2. Any earnings we make in our roth accounts (assuming less than 1 year investment) are tax free? From my research the answers to these are yes and yes. Just wanted to run this by someone to make sure I'm not missing anything. And if that's the case, then I'm assuming it would make sense to do any short term investments in the roth accounts. If we make out and want to get our hands on some of those earnings, we can pull out what we be the equivalent of our original contributions? Am I on the right track or way off? Thanks for any insight, Ben"

MSCantrell said: "[QUOTE=andersonbd1] ... an unsheltered (correct term?) account with Scottrade. <...> If we make out and want to get our hands on some of those earnings, we can pull out what we be the equivalent of our original contributions? Am I on the right track or way off? Thanks for any insight, Ben[/QUOTE] Hi Ben! The term you're looking for is not [i]unsheltered[/i] but rather [i]non-qualified[/i]. That is, it doesn't qualify for any tax-advantages according to IRS guidelines; it's just a regular old account. As far as question two goes, you CAN get all the money out if you want to. I know, I'm picking nits a little bit here, but it's important to be clear when we talk about these things. So you CAN get all the money back out. Your [i]cost basis[/i], that is, the money you deposited into the account, you can get back out [U]after five years [/U]without paying taxes or penalties on it. Somebody correct me if I'm wrong here, but even your cost basis is subject to capital gains tax and 10% penalty for the first 5 yr. The earnings (or capital gains) you can get back out, too, but you pay taxes and a 10% penalty on it. After you turn 59 1/2, you can get all the money out, no taxes, no penalties. Bottom line is, if you're trading toward a retirement nest egg, do it in the Roth. If you want to spend the profits sooner, do it in the nonqualified account. Hope that helps! Mike"

drdan said: "MS is correct. I do not know the specifics but anytime you pull money out of an IRA be it a Roth or any other there are penalties until you are a certain age."

LongArm said: "[QUOTE=MSCantrell]Your [i]cost basis[/i], that is, the money you deposited into the account, you can get back out [U]after five years [/U]without paying taxes or penalties on it. Somebody correct me if I'm wrong here, but even your cost basis is subject to capital gains tax and 10% penalty for the first 5 yr.[/quote] Actually, that's not correct. You can withdraw your contributions (cost basis) to a Roth at any time for any reason tax and penalty free. No need to wait 5 years. [quote]The earnings (or capital gains) you can get back out, too, but you pay taxes and a 10% penalty on it. After you turn 59 1/2, you can get all the money out, no taxes, no penalties. [/quote] True--as long as you're 59 1/2 [U]AND[/U] you've had the Roth for at least 5 years. That's probably where you got the 5 year thing from on withdrawing contributions."

MSCantrell said: "[QUOTE=LongArm]Actually, that's not correct. You can withdraw your contributions (cost basis) to a Roth at any time for any reason tax and penalty free. No need to wait 5 years. True--as long as you're 59 1/2 [U]AND[/U] you've had the Roth for at least 5 years. That's probably where you got the 5 year thing from on withdrawing contributions.[/QUOTE] Right! My mistake."

drdan said: "[QUOTE=LongArm]Actually, that's not correct. You can withdraw your contributions (cost basis) to a Roth at any time for any reason tax and penalty free. No need to wait 5 years. [/QUOTE] Well that's interesting! I was under the assumption that there was still a penalty. I realized no taxes but I thought there was a penalty. thanks for correcting LA."

thezster said: "He sure does know a lot about retirement stuff - for a 45 year old...... :th_coolio:"

LongArm said: "[QUOTE=thezster]He sure does know a lot about retirement stuff - for a 45 year old...... :th_coolio:[/QUOTE] A) I made it all up. B) I'm really 112 years old. C) A & B. D) What was the question?"