You have several investment choices when it comes to retirement accounts that you can use to save for retirement. If you are reading this, you probably already know that Roth IRAs are great retirement plan investment vehicles you can use to trade stocks. For those new to the concept, here are few things to know about Roth IRAs. They are individual retirement account that has tax benefits for your retirement savings plan. An alternative to a Roth IRA account is a brokerage account. The major difference between a Roth IRA account and brokerage accounts is that a brokerage account does not offer tax benefits. In other words, your dividends or interests that accrue in your brokerage account are tax deductible using the going rate for the tax year.
One key feature of Roth IRAs is that you do not need to take any distribution during your lifetime. This distinguishes Roth IRAs from a Traditional IRA, which requires you to make Required Minimum Distributions (RMD) from the age of 72. Traditional IRAs are individual retirement accounts that allow your pre-taxed investment earnings to grow, with a tax-deferred interest. Earnings from Traditional IRAs are classified as ordinary income, therefore they are subject to your ordinary income tax. You can engage the services of a knowledgeable tax advisor to educate you more.
One benefit of Roth IRAs and why they are mostly preferred to a brokerage account is that you get to enjoy tax-free growth on your investment earnings. Any qualified withdrawals you make are tax-free and penalty free. When looking for investment options, ensure you opt for platforms with objectives risks charges that offer, fixed income products no-transaction fee mutual funds and offer commission free exchange-traded funds. When you invest in Roth IRA, you will be able to grow tax free contributions which will boost your personal finance for the future. It is advisable to get a competent financial planner that will help you manage your individual stocks.
While you’re looking to open a Roth IRA account with a reputable company with full advertiser disclosure like Charles Schwab, it is essential to know that there are special rules when trading stocks using your Roth IRA. For example, some companies require a minimum account contribution to get started with them. Knowing all these could play are role in the company you finally choose to go with.
The benefits and rules of trading stocks using your IRA account are important trade-offs to consider. Knowing the rules is important to avoid getting into trouble as well as making sure you don’t lose your valuable returns as a result of paying fines. The biggest benefit of trading stocks using your IRA is that you can invest your returns back in without having to pay tax on them. This includes dividends.
There is the IRA accounts five years rule that comprises 3 components which consist of withdrawal earnings; conversion of traditional IRA to Roth; and inheritance of a Roth IRA by a beneficiary. The five years rule must be strictly followed, or you will be charged income taxes on earning withdrawals and 10% penalty fee.
Because of this learning, the rules of trading are well worth the effort.
What is Roth IRA Trading?
Trading with your Roth IRA is a lot like the way you would trade using traditional stocks. In this case, however, you are trading with funds in your retirement account. The main difference as I mentioned earlier is that your returns are tax free so you can reinvest all your profits. For example, if your investment grows from $3000 to $3500 in the first few months, you can reinvest that $500. This should not be a short term plan as it is a sure way of growing your retirement account.
Trading stocks with your IRA is a good addition to traditional IRA investments like mutual funds. It also has the potential for higher returns if you do it right. You can also combine retirement savings to both an IRA account and a private employer retirement plan such as 401k. However, you must take note of important information before going ahead to combine these two retirement plans.
What are the Roth IRA Trading Rules?
Now that you know what IRA stock trading is all about, let’s cover some of the trading rules:
No margin accounts. A drawback with ROTH IRAs is that you cannot invest on margin. A margin account is a type of brokerage account in which you borrow investments from brokerages to buy securities and gain interest. However, because the contributions must only be tax-deducted income, your account cannot be a margin account. This also means that you cannot do day-trading (buy and sell stocks on the same day) with your account.
No short-sell stocks. Making use of short-sell stocks is an investment strategy in which you borrow stocks from a brokerage, betting that the price for the stocks will decline. Once the price does decline, you make a profit by buying the stocks from the brokerage at a lower price. However, you cannot short-sell stocks according to the Roth IRA stock trading rules because you need a margin account for borrowing the stocks from a brokerage.
Limited trading options. Apart from Roth IRA stock trading (that is subject to the restrictions mentioned above), you can also carry out trade with mutual funds and exchange-traded funds. However, there are not many other options available. Moreover, you can never actively trade mutual funds because you are only a contributor to these funds. However, you can trade exchange-traded funds (ETFs) more frequently and actively.
The Age 50 rule. There is what is called the ‘catch up’ contribution which applies to people who are 50 or older. This ‘catch up’ contribution for a year can be as much as $1000, but you must have clocked age 50 in the year you intend to make the contribution.
The rules above highlight what you can and cannot do when trading stocks in your Roth IRA account. While there are restrictions and limitations what still makes trading appealing on ROTH IRAs is that you don’t have to worry about the taxes, that upside might more than make up for the complexity of keeping with these rules.
What are the Drawbacks of Trading?
Aside from the restrictions I already mentioned there are other things to consider that apply to ROTH IRAs in general that limit how much you can make as well as how and when you can use the money you make.
Annual limit. Keep in mind that stock trading is still stock trading, it’s not always going to be profitable. You will encounter losses in trade, and that is normal. The problem here though is that contributions have an annual limit of $5,500. This means that if you have already contributed to this limit, you may not contribute more money, despite having lost a large sum of money in trade. This prevents you from actively trading from your Roth IRA account.
- Restrictions on withdrawals: The primary goal for most people when trading stocks bonds and other investment products is to earn money more quickly. With Roth IRAs though, you cannot withdraw the money from your account unless you are 59 ½ years old. In most cases, long-term investments turn out to be more profitable than trading because of the lesser risk involved.
At the end of the day, just like any investment, there are multiple factors to consider when making any investment, and that includes deciding on how to invest your Roth IRA. You should never rely on a single investment, and please read extensively on Roth IRA to make sure you stay profitable and within the law. It is up to you to weigh all the factors and determine what’s best for you.
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