If you sell an investment for more than its purchase price, you have a capital gain. Unless the gain is in a tax-sheltered account, you’ll have to pay capital gains tax. If you’d like to contribute an unsheltered gain to a Roth individual retirement account, you’ll need to observe the contribution limits. You cannot roll a capital gain into a Roth IRA unless you earned it in a qualified employer plan or traditional IRA.
A Roth IRA doesn’t give you a tax deduction on your contributions, but you can withdraw your contributions tax-free at any time. You can also withdraw your earnings tax-free if the Roth account is at least 5 years old and you are at least 59 1/2. Otherwise, you face a 10 percent penalty for an early withdrawal. The Internal Revenue Service offers some exceptions to the penalty if you are underage, but there is no escaping the penalty on earnings if you remove them before the five-year period. The owner of a Roth IRA doesn't have to take required minimum distributions at age 70 1/2, either.
If your capital gain stems from an investment in a traditional IRA or a qualified employer plan, such as a 401(k), 403(b) or 457, you can move it into a Roth IRA. You can perform a trustee-to-trustee transfer, which has no withholding requirements. Alternatively, you can roll over the gain by withdrawing it from the old account and, within 60 days, depositing it into the Roth IRA. If you roll from an employer plan, your employer must withhold 20 percent, which you can reclaim when you file income taxes. You’ll have to pay taxes when you convert assets from a traditional-style qualified account to a Roth IRA.
Capital Gains Taxes
If you are not performing a rollover, you must observe the IRA contribution limits. Contributing your capital gain to a Roth IRA doesn’t save on your current taxes. However, any future earnings on the reinvested gains are forever tax-free. The long-term capital gains tax -- on the sale of investments you’ve held for longer than a year-- depends on your modified adjusted gross income. As of 2013, if you are single and your MAGI exceeds $400,000, your long-term capital gains rate is 20 percent. This rate also applies to married couples with MAGI exceeding $450,000. For lower MAGIs, the tax rate is 15 percent if your tax bracket is 28 percent or higher. Otherwise, your gains are tax-free. The rate on short-term gains is your marginal tax rate. Capital losses offset capital gains and up to $3,000 of annual ordinary income. You can carry unused capital losses forward to future years.
Roth Contribution Limits
In 2013, you can contribute to a Roth IRA your entire annual income or $5,500, whichever is less. If you’re age 50 or older, the limit is $6,500. The IRS restricts your contributions if your MAGI exceeds $112,000 and prohibits them once your MAGI climbs above $127,000. If you’re married filing jointly, the corresponding limits are $178,000 and $188,000. If your income locks you out of a Roth contribution, you can contribute the money to a traditional IRA and then roll it over to the Roth account. Traditional IRAs have no income limits.
You can pass your capital gain to others after your demise. Your beneficiary doesn’t pay taxes on a bequeathed Roth IRA, though if your estate grows large enough, a non-spouse beneficiary might be on the hook for a portion of the estate taxes. The federal exemption for estate taxes as of 2013 is $5.25 million. Although the owner doesn’t have to take minimum distributions from a Roth IRA, non-spouse beneficiaries must observe the same distribution rules as those for traditional IRAs. Your spouse can assume ownership of an inherited Roth IRA and avoid required minimum distributions. The distributions are tax-free, so a beneficiary might opt for a quick lump-sum payout.
- Internal Revenue Service Publication 590: Individual Retirement Arrangements
- Oblivious Investor: Dividend and Long-Term Capital Gain Tax Rates for 2013
- Internal Revenue Service: Retirement Topics - IRA Contribution Limits
- Internal Revenue Service: Amount of Roth IRA Contributions That You Can Make For 2013
- Internal Revenue Service: What's New - Estate and Gift Tax
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.