Individual retirement accounts offer tax benefits, including tax-sheltered growth, for your retirement savings. You can contribute stock gains -- or any other source of money -- but, if stock gains are your only source of income, you are not eligible to contribute to an IRA. Worse, if you contribute when you're ineligible, you owe Uncle Sam a 6 percent penalty each year you don't correct it.
Stock gains don't count as compensation because they are unearned income -- you didn't earn the money from working. To contribute to an IRA, you must have compensation or taxable alimony, and the compensation must be at least as great as your contribution. If you only earned $4,000 and the rest of your income came from stock gains, you could not contribute more than $4,000 total to your IRA. That means if you only have stock gains as income, even if they're taxed at ordinary income tax rates rather than long-term capital gains rates, you aren't eligible to contribute.
If you do have other compensation during the year, whether it's from a job, self-employment or taxable alimony, you can use whatever money you have on hand to make your IRA contribution. For example, say you did a little consulting work on the side and made $10,000 in self-employment income, but you used that money for your son's college tuition. If your stocks jump toward the end of the year and you sell, you can use the proceeds from selling the stocks to put in your IRA. The IRS doesn't care exactly where the dollars came from.
Money Contributions Only
IRAs only accept contributions in money form -- think cash, check, money order or something similar. Once the money is in the IRA, you're allowed to invest it in stocks, including stock that you own in your non-IRA portfolio. But, if you want to get money into your IRA, you have to sell the appreciated stock, contribute the proceeds to your IRA, and then repurchase the same stock in the IRA.
Spousal IRA Contributions
When you're married, you can count your spouse's compensation as your own only if you file a joint return. For example, if your spouse worked and your only income was the proceeds from your stock sales, you can count your spouse's compensation as your own, qualifying you to contribute to an IRA. However, compensation can't be counted twice. For example, if your spouse only brought home $7,000 in compensation and contributed $5,000 to an IRA, you only have $2,000 in compensation left for you.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."