IRA Rules

Archive for September, 2008

Question: What is the IRS Wash Sale Rule with “replacement” shares in IRA – how is loss recovered?

If you have a wash rule sale, the capital loss cannot be claimed as part of the wash sale transaction, but the loss can be added to the basis when the replacement shares are sold, so the loss is actually deferred. However, IRA transactions are not taxable events, so if the replacement shares were bought in an IRA, how is your capital loss recovered?

Answer: It isn’t.

You have a wash sale meaning that you cannot take the loss on the shares you sold if you rebuy them inside an IRA. (Since you are the beneficiary of the IRA, it’s a related party.)

Unfortunately, the basis of the stock you buy inside the IRA is never adjusted for the loss, so you would never get the tax benefit of the loss.

Question: Roth IRA early withdrawal – The 10% penalty applies only on the earnings or the principal as well?

For example – Let’s say I deposit $5000 in Roth in 2005 and by 2010 I earn $1000 on it as interest or whatever. Now, if I withdraw (no exemptions) now, will I be paying the 10% penalty on $1000 or the whole $6000? Will I be paying $100 or $600 in penalty?

Answer: You will pay the10% penalty on your earnings and you will pay taxes on your earnings at your marginal rate. Since you have paid taxes on the contributions, there are no further taxes or penalties to pay there.

Investing Early For Retirement