Sold $2500 of individual stock (mostly earnings since the shares were bought ~15yrs ago) to fund a mutual fund account or Roth IRA. To avoid taxation, should I put that money in my IRA, then take a $2500 loan from my IRA (at4%) I want to keep this stock money accessible before retirement and because I am only 27 and in a low tax bracket, would like to start funding a Roth. Thanks!
As others said, you cannot take a loan from an IRA.
However, it sounds like you can avoid federal capital gains tax if you are in a low tax bracket because investors in the 28% or lower bracket do not pay federal income taxes on capital gains. However, if your state has an income tax, you will be subject to state tax.
You also have mutually exclusive goals for your money. If you want to keep the money accessible, it sounds like that money swill be needed and should not be in an IRA but in a brokerage account. If the money is meant for retirement, put it into a Roth IRA and don't touch it. Manage it well, but treat it as if it became poison if taken out. People who take money out early from retirement accounts, do just that - they kill their retirement and the vast majority of Americans fall prey to that temptation.
There are lots of "moving parts" to your question so let me tackle the components and then offer some thoughts on what it sounds like you're trying to achieve.
If you sold the individual stock at a gain (outside of an IRA or Roth IRA), the capital gains will be taxable regardless of what you decide to do with the proceeds. Having said that, you indicated that you're in a low tax bracket. If you're in the 10% or 15% federal income tax brackets, the long-term capital gains tax rate is currently 0%. That would be for 2013 taxable income up to $36,250 for a single filer or 72,500 for married filing jointly. You'd need to check if California will impose a capital gains tax at your taxable income level.
If you contribute the $2,500 to an IRA you can take a federal income tax deduction for that amount. If you contribute it to a Roth IRA, there's no income tax deduction but it has the potential to grow tax-free, provided you don't draw it out before you reach age 59 1/2.
Loans cannot be taken from IRAs or Roth IRAs.
If you draw the money out of an IRA, it's considered a "distribution" and will be subject to income tax and a 10% federal penalty tax if you're under 59 1/2. (There are some exceptions to the 10% penalty such as first time home buyer, disability, certain medical expenses, and so forth.)
If you draw the money out of a Roth IRA, your original contributions can be distributed tax-free (because you already paid tax on them), but any earnings withdrawn would be subject to income tax and the same 10% federal penalty tax if you're under 59 1/2.
Roth IRAs are intended to be long-term retirement accumulation vehicles and, in many cases, they can also be great for passing wealth to the next generation on a tax-favored basis. While I don't recommend people use Roth IRAs for their "accessible money," if you find yourself in a tough spot, you can always withdraw from the Roth IRA up to the original contributions without incurring taxable income. But that also assumes that your investments have done OK and that you have more in your Roth IRA than you contributed.
If you need "accessible money"--meaning you may need it in the short-term for some purchase, or as an emergency reserve--then I recommend you keep those funds in savings or a money market account outside of any IRA or Roth IRA. And yes, with current short-term interest rates nailed to the floor, savings and money market rates probably won't earn enough interest to buy a candy bar, but at least the funds will be available when you need them.
Hope this helps. All the best!
Johnathan, You can't take out a loan from an IRA. So, putting money in a traditional IRA and then withdrawing some of the money prior to age 59 1/2 would not make sense. The "early" withdrawal would be subject to taxes plus a 10% IRS penalty.
If you invest the proceeds in a Roth IRA, you can withdraw your basis (the amount you have contributed) at any time. Any growth in your investment could not be withdrawn until age 59 1/2, otherwise it would be subject to taxes plus a 10% IRS penalty.
Finally, investing the proceeds from your stock sale in either a traditional or Roth IRA would not help you avoid paying taxes on any capital gains from your stock sale.
No. You must need the money if you are asking about putting the money into an IRA then taking it out as a loan (which you can't do anyway). Just pay whatever the capital gains taxes are on the sale of the stock and use the proceeds. If you don't need the money, the deduction you get for putting the money into an IRA will help offset the capital gains taxes.
In addition to the comments above, if you take a loan from your 401k, and repay over 5 years, you are repaying with after-tax dollars. When you withdraw at retirement, you will be paying tax again, effectively double taxation. And if something happens to you or your job, and you do not repay on schedule, you are in default; you must pay income tax on the balance plus 10%