Roth IRAs have been around for less than 20 years, but they've revolutionized the way people save for retirement. Although they provide the same tax deferral as their traditional IRA counterparts, Roth IRAs also offer unique provisions that make their income tax-free. This means for the most part, taxpayers don't have to worry about the character of income and gains that their Roth IRA generates. Only in rare circumstances can Roth IRA investors claim losses, and given the nature of the stock market, that happens very infrequently.
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Why short-term and long-term gains don't matter in Roth IRAs
IRAs in general make the tax treatment of your investments much simpler than it would be in a taxable account. Investors in regular accounts have to consider whether the gains they realize are subject to relatively high short-term capital-gains rates or lower long-term capital-gains rates. The amount of time you've held an investment can make a huge difference in your eventual after-tax profit, and in some cases, it can be worthwhile to wait to sell until your gains are eligible for long-term treatment.
In a traditional IRA, sales of investments inside your retirement account have no immediate tax impact. Any gain is deferred, and for traditional IRAs, any tax on that gain or other elements of the account's income isn't due until money is withdrawn. Moreover, at that point, the IRS no longer cares whether the income generated was short-term or long-term in nature; it will charge the ordinary income tax rate regardless.
Roth IRAs add tax-free treatment to the mix. You don't get an up-front deduction for Roth IRA contributions, but the payback is that there's no tax on distributions in the future, either. Therefore you never pay taxes on short-term or long-term gains in a Roth IRA. The whole question is rendered moot.
When losses matter
There's one situation in which you can actually take a taxable loss in a Roth IRA. To do so, you have to liquidate all of your Roth IRA holdings, including any held in separate accounts. Then you must take a distribution of the entire amount. If the distribution is less than your tax basis in your liquidated Roth account, then the difference is a loss that you can claim by itemizing deductions. However, the deduction is a miscellaneous one, so it's available only to the extent that the dollar amount exceeds 2% of your adjusted gross income.
Except for that rare situation, however, you don't typically have to think about gains or losses on investments in a Roth IRA. Given the value of the tax-free aspects of the Roth, you can hope that your investments will produce big long-term gains that will escape the tax man entirely.
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