[John Larry]

I have an IRA through a brokerage company that allows individual stock trading. I have been trading stocks since January 2009 so all the proceeds/losses are short term. I need to sell some of the stock while in the IRA and make a cash withdrawl. I am only 53 so it will be an early withdrawl. I am making the withdrawl to pay for my daughters college as well as general income due to my current unemployment. My question is if the short term capital gains tax applies or is the money just taxed at my normal tax rate. Also would the money used to pay for her college be exempt from the 10% penalty?

[ebaines]

Your withdrawals are taxed at regular income rates regardless of whether any gains in the underlying stocks were short term or long term, or whether the account earned dividends, interest, etc. or had capital losses. I am assuming here that this account is a traditional IRA where your own contributions were made with pre-tax money- if you used any after-tax money (i.e. you made non-deductible contributions) then a portion of the withdrawal is exempt from income tax. And yes, money withdrawn from your IRA for higher education expenses for yourself, your spouse, or child is exempt from the 10% early withdrawal penalty.

[KISS]

I believe, that if you read the IRS regulations, you will find that capital gains/losses can only be taken after all IRA money from all traditional orRoth accounts are withdrawn. e.g. WHen all Roth moey is exhausted, you can do capital gain/loss. The investment companies don't even create an average cost basis for this scenereo. At least that's the way I understand it.

[ebaines]

I believe, that if you read the IRS regulations, you will find that capital gains/losses can only be taken after all IRA money from all traditional orRoth accounts are withdrawn. e.g. WHen all Roth moey is exhausted, you can do capital gain/loss. The investment companies don't even create an average cost basis for this scenereo. At least that's the way I understand it.

KISS - I don't follow you. Are you saying you can't book capital gain and loss on investment activity OUTSIDE of your IRA as long as you have assets still in the IRA? That's not correct at all. But perhaps I am miusunderstanding what you are trying to say - please clarify.

[KISS]

No:

Suppose you have two traditional IRA's. One traded stocks. Your over 70 1/2. One of these IRA's had stock.

So, your now 90 years old and made the LAST withdrawal from your traditional IRA's. At, this point, you can do capital gains and losses of the IRA.

It seems as if the IRS treats the Traditional IRA's as a single account. It can be comprised of Stock and other money making investments, but only when you liquidate all of your assets in the traditional plan, can you claim a loss.

Otherwise, it would appear unfair to the IRS and the taxpayer not to allow capital losses.

Gains, I don't think can be figured for traditional plans.

For Roth IRA's, it would make sense that both gains and losses can be figured.

I know I need a reference to support that.

[KISS]

Reference: Publication 590 (2008), Individual Retirement Arrangements (IRAs)

Top of page "Recognizing losses"

It's so darn obscure, that the investment companies don't compute an average cost basis for the accounts.

[ebaines]

Got it - you can't claim a capital loss on EITHER a traditional or Roth until you've withdrawn ALL funds from the account, and even then the loss is determined to be the difference between the amount you withdraw versus your total after-tax contributions. But in either case, the performance of individual stock holdings in the account - and whether any one of them had a gain or loss - is immaterial. It's the value of the account that's important, not the value of individual holdings. And that's what the OP's question was about. In any event if the account is worth more than your after-tax contributins you pay regular income tax on your gains in the traditional IRA, not long term capital gains.

I found this web site description helpful:
Deducting Losses on Roth IRA Investments

[KISS]

Nice. What isn't nice is that my investment company doesn't compute the average cost basis for me.

[ebaines]

Nice. What isn't nice is that my investment company doesn't compute the average cost basis for me.

You don't need it! All you need to know is the amount of your after-tax contributions. I bet that you'll find that on your IRA statements.

[KISS]

With traditional, they are pre-tax dollars. So, suppose that after-tax dollars are zero which can be.

Now suppose the stock looses mone and I withdrew all of my traditional IRA money. Some was in a stock fund and other accounts were not, but I still had a loss.

Once you start taking money out of an IRA, the amount of excess contributions gets modified because some of the excess is taxed.

I think I can see how that would work. That's still a number you have to keep updating from year to year.

[ebaines]

In your example of a traditional IRA that is worth less than the what you contributed in pre-tax dollars there is no loss allowed. If you have only pre-tax dollar contributions (as many people do with their traditional IRA), then your basis from a capital loss point of view is zero. Every dollar you withdraw is taxed as ordinary income, and there is no capital loss to be concerned with.

However, if you have some portion of contribution that was made with after-tax dollars, then you need to determine whether the account value is more or less than the after-tax portion of your contributions. Assuming that there is a gain in the account, then on every withdrawal you have to to apportion some percentage of the wthdrawal to return of your after-tax contribution (which is tax free) and the remander as gain in the account (which is taxed as ordinary income). So again, no need to worry about "capital gains or losses," and in fact your IRA custodian should furnish a report detailing how much of what you withdrew was return of your after-tax contribution versus gains. They report the taxable portion to the IRS on 1099-R.

However, if the vaue of the account is less that what your after-tax contributions, you can taka capital loss on the difference once you have emptied the account out. The amount of the loss is the differece between the amout af after-tax money you contributed and what you actually withdrew. As as you pointed out previously, you can only take this loss once the entire account is depleted (that's the only way to make sure there wouldn't ultimately be a gain). So again, all you need to keep track of is the amout of after tax contributions you've made, and as you make withdrawals the amount of after-tax contributions still available to "offset" the withdrawals. Again, the IRA custodian does that for you.