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Selling stocks to contribute to a Roth IRA

Posted by Andrew Chan  December 23, 2009 10:00 AM

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I have $25,000 invested in stocks in a taxable brokerage account. Most of these stocks have not done so well during the past couple of years despite the market?s recent gains. If I sell $5,000 from this account, open a Roth IRA and use the $5,000 to make a contribution to the Roth IRA, can claim a loss on my 2009 tax return? Will claiming a loss affect the taxability of my Roth IRA?

Generally, if you sell your stocks in a taxable account at a loss, you will be able to use that loss to reduce any taxable gains realized in that same year. If you do not have any gains during that year or if your losses exceed your gains, you can claim up to $3,000 of net capital losses on your tax return. Any net losses above $3,000 can be carried forward to your future tax returns.

If you subsequently use the proceeds from the sale of your stocks and make a contribution to a Roth IRA, the money contributed and any future earnings on those contributions will be tax free if you make qualified distributions/withdrawals from that account.

Review Publication 590 from the IRS for more information about Roth IRAs at http://www.irs.gov/publications/p590/ar01.html.
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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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