Tax Implication of Selling a Mutual Fund Roth IRA

You can take a 60-day penalty-free withdrawal from your Roth.

You can take a 60-day penalty-free withdrawal from your Roth.

The Roth individual retirement arrangement account differs from a traditional IRA in that instead of contributing money that isn't taxed and paying regular income tax when you pull the money out, you contribute after-tax dollars, but withdraw funds tax-free. You also aren't taxed if you trade mutual funds within your Roth IRA account without withdrawing any money. There may be tax implications for selling to take a distribution, though.

Non-Qualified Distributions

If you sell mutual funds in your Roth IRA and pull the money out through a distribution that is not allowed by the Internal Revenue Service, the IRS penalizes you. They require you to pay 10 percent of your distribution as an early withdrawal penalty. You also have to pay tax on any earnings on the funds in your Roth account. For example, if you put $5,000 into your Roth and use it to buy 100 shares of a mutual fund, then sell those shares for $6,000, you would pay $600 in penalty tax as well as being taxed on the $1,000 profit.

Qualified Distributions

If you meet the IRS' rules, you can sell mutual funds in your Roth IRA and pull the money out as a tax-free distribution. This applies withdrawals when you are at least 59-1/2-years-old for funds that have been in your Roth account for at least five years. Distributions are also tax-free if they get made because you become disabled or if they go to your heirs after you die.

Additional Qualified Distributions

If you aren't 59-1/2 yet, disabled or dead, the IRS will also let you sell your mutual funds and take money out your Roth tax-free under some special circumstances. When you buy your first house, you can sell mutual funds in your account and pull out up to $10,000 without paying the 10 percent penalty. As of the date of publication, the IRS also lets you withdraw money from your Roth penalty-free if you have high medical expenses, have to pay medical insurance during a period of unemployment or if you use the money to pay expenses related to your higher education.

Alternatives to Roth Distributions

If you're considering taking money out of your Roth IRA and you only need it for a relatively short time, you may be able to avoid paying penalties. The IRS lets you sell mutual funds and pull the money out of your Roth account tax-free for any reason as long as it gets replaced within 60 days. This is actually the same provision that lets you rollover money between different Roth IRA accounts. You can only do this once per year, though.

 

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

Photo Credits

  • Hemera Technologies/AbleStock.com/Getty Images