How to Sell Stocks in a Roth IRA so that the Distribution is Tax Free
Hi! I am under 59 1/2. I rolled over my 401k Roth to a Roth IRA a year ago. The rollover amount consisted of post-tax contributions and earnings (Let’s say, hypothetically $100K was rolled over — $60K post-tax contributions and $40K earnings). I bought shares of 20 various companies in the Roth IRA.
My understanding is that a distribution of regular contributions is always tax- and penalty-free, regardless of when the distribution occurs. My question is: If I only sell a few company shares (e.g. Company X shares, Co. Y shares and Co. Z shares) and my distribution of the combined proceeds is $60k, will the distribution be tax- and penalty-free? For example, total proceeds is $70K and I make a distribution of $60K. Is the distribution of $60K tax free?
Or is the tax free portion calculated by applying a ratio to the proceeds (i.e. 60K/100K * Company X proceeds = tax free portion; 60K/100K * Company Y proceeds = tax free portion, etc.)?
Thank you!
Permalink Submitted by David Mertz on Mon, 2018-08-27 22:07
“If I only sell a few company shares (e.g. Company X shares, Co. Y shares and Co. Z shares) and my distribution of the combined proceeds is $60k, will the distribution be tax- and penalty-free? For example, total proceeds is $70K and I make a distribution of $60K. Is the distribution of $60K tax free?” Yes. When you rolled the Roth 401(k) over to the Roth IRA, the $60k of contribution basis in the Roth 401(k) became contribution basis in the Roth IRA. Distributions from a Roth IRA are subject to Roth IRA ordering rules, so the $60k of contribution basis now in your Roth IRAs is distributed from the Roth IRAs first, tax and penalty free. There is no ratio calculation involved.
Permalink Submitted by Yee-Peng Tang on Tue, 2018-08-28 16:18
Thank you!
Permalink Submitted by Alan - IRA critic on Mon, 2018-08-27 23:04
Remember, all the activity within your IRA has no tax relevance. The only thing that matters is the dollar value of your distribution. Since the first 60k comes out tax and penalty free anytime, any distribution of 60k or less will be non taxable under the Roth IRA ordering rules. However, while non taxable you still have to report this distribution on Form 8606, Part III, where you indicate the amount of the distribution and the amount of your regular contribution basis on line 22. Follow the form and you will see that the amount is non taxable.
Permalink Submitted by Yee-Peng Tang on Tue, 2018-08-28 16:19
Thank you!