Tax Advantages for Individual Securities in a Roth IRA

by Emily Weller

Individual securities or stocks are investment options for people who have a Roth IRA. As with investing in mutual funds or opening an IRA CD, investing in stocks provides tax benefits for some people. Money contributed to a Roth IRA has already been taxed. The account holder will owe no taxes on qualified withdrawals. People who expect to pay fewer taxes in retirement may not benefit from a Roth IRA.

No Tax When the Stock Improves in Value

Certain securities will appreciate considerably. When you purchase them on their own, you will pay tax on the amount you earn from them. In a Roth IRA, you will not pay tax on the amount above the cost basis when the securities appreciate as long as you leave the money in the account until you are eligible for withdrawal.

Avoid Tax on Dividends

Some securities pay dividends to investors. If you own such stocks and have them in a Roth IRA, you will not need to pay tax on the dividends you receive. This is particularly useful for non-qualified dividends, which are taxed as your income is. For example, if you are in the 20 percent tax bracket for income, you would usually also pay 20 percent tax on non-qualified dividends. Qualified dividends are only taxed at the rate of 15 percent if they are not in a Roth IRA.


While the money you contribute to an IRA and the money earned by the IRA, can be withdrawn tax-free, there are some restrictions. The Roth IRA must have been set up at least five years before you withdraw from it without paying taxes on earnings and a 10 percent penalty. If you are not 59 1/2 years of age, you may withdraw earnings tax-free to pay for a first home or certain medical expenses. You may also withdraw early if you become disabled.


Individual stocks may be a more risky investment than mutual funds or other options. The money is not insured, as it is when deposited into an IRA CD. While the stocks can appreciate considerably one day, they may plummet in value the next, meaning a person has paid tax on money that no longer exists. Younger people may benefit more from individual securities in a Roth IRA, as they can transfer the stocks to a mutual fund or other vehicle as they get older. If they lose money, they still have years to recuperate.

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