IRA Rules for Selling Stocks & Reinvesting

by Kay Miranda

An Individual Retirement Arrangement (IRA) is a tax-sheltered structure that allows the IRA owner to save for retirement while getting tax-deferred growth on assets. The structure of the IRA is a substantial benefit that helps investors grow assets without worrying about an annual tax bill. Investors who buy and sell a lot of securities should understand certain rules applying to IRA transactions.

Internal Transaction Rules

An IRA owner is allowed to buy and sell securities within the IRA as often as he wants to. This means that you can buy XYZ stock and hold it for a period of time, sell it and buy it back. It doesn't matter if you hold it for one day or for 10 years, no short-term or long-term capital gain taxes are owed so long as the money and asset remain in the IRA structure. Brokerage transaction fees may be associated with the trades, but these exist inside or outside of an IRA and are not exclusive to IRA rules.

Rollover Rules

The Internal Revenue Service (IRS) states that when rolling money from one qualified plan to another (i.e., one IRA to another IRA), the assets that leave the first IRA must be "like-kind" to the assets deposited into the new IRA. If you have stock XYZ in brokerage account one, you may do a direct rollover and transfer the stock into the new IRA account. This is a beneficial feature if fears exist of buying the stock back at a higher price in the new IRA. What you are not allowed to do is liquidate XYZ stock and start an indirect rollover--in which you receive the check instead of it going straight to the new IRA custodian--and then buy the stock back while the cash is in your hand. You will not be able to deposit the new shares of XYZ stock into the new rollover IRA. To complete the rollover, only cash can be put in the account since only cash left the old account. Buying the stock and trying to deposit it triggers a taxable event.

Distribution Rules

When an IRA owner turns 70.5 years of age, annual required distributions from a taxable IRA must begin. These distributions, referred to as required minimum distributions (RMD), must be taken no later than December 31 starting in the year the participant hits the age threshold. Most investors take the RMD as cash and either spend it or reinvest it back into stock at the existing market price. For investors who want to hold onto stocks, they can. An investor can transfer the stock out to satisfy the RMD but establishes the cost basis at time of transfer. This means the investor keeps the stock for the original price paid, but establishes the cost basis as the price per share at the time the stock is transferred out. When the stock is eventually sold, the higher cost basis reduces total capital gains later but keeps the investor from having to buy the stock again at market fluctuating prices.