Daniel X. Bustamante, Co-Founder and Lead Coach
Let’s talk about retirement. This is a tough subject because there are so many options. Some great, and some not so great. In this article, I’ll cover some basics about IRAs and some of the rules and regulations that go with them.
Traditional IRA and Roth IRA
An individual retirement account (IRA) is an individual retirement account that has tax advantages that offer people tax breaks for investing money for retirement. This is a very effective way to save your money for your future retirement. Assets in the IRA will not be taxed until they are officially withdrawn. The traditional IRA plan also may give people access to tax-deductible contributions for people who don’t participate in an employer-sponsored plan.
With a ROTH IRA, you pay tax on income before you make contributions to the ROTH IRA. You’ll pay no tax on the earnings when you make withdrawals in retirement. An IRA is an investment account that you can set up at a brokerage firm or a financial institution. Over time you can continue to add money to your account and use it to make investments. Individual accounts and mutual funds can be purchased and the money in the account can be withdrawn to have money set aside for retirement.
Benefits of an IRA
The main benefits of a traditional IRA and the ROTH IRA is the investments in your IRA grow tax-deferred. This means that you end up owing nothing on the gains so long as the money remains in the IRA. If you are 50 and older you can save an extra $1,000 catch-up contribution. This allows you to save more money each year. You can contribute up to $5,500 per year. The IRA also allows individuals to take out money before age 59 ½ to pay for certain expenses.
Day trading your IRA
There are a number of rules and regulations around day trading your IRA account. The Motley Fool has a very informative article on this, which is worth a read. Here’s the link here.
The first thing you’ll need to do is decide what type of individual retirement account you need. The traditional account is great because the money you contribute to this account can be deducted from your taxes this year. The traditional account allows many individuals to get tax breaks when they are most important. The ROTH IRA has contributions that are made by post-tax dollars so they cannot be deducted from your taxable income. The stock trading rules for ROTH and traditional IRA account are the same but the accounts must still be used differently.
Trading in an IRA account is very beneficial because it allows you to defer or avoid taxes on dividends and capital gains, so all of your money can be invested tax-free. The regulations prevent anyone from being allowed to borrow money from an IRA account. There are no restrictions for day trading on IRA accounts with more than $25,000. You want to avoid trading too often because this can lead to a 2-day trading violation rule. Breaking any rules can lead to strict restrictions being put on your IRA account. You should also only by using your IRA account when you have an adequate amount of settled funds in your account to cover any costs.
With IRA accounts you cannot sell stocks short. You can only purchase Inverse Exchange Traded Products (ETPs), and you can almost replicate a short position by purchasing puts and call spreads with the backside of the money. With an IRA account most brokers will allow you to buy leveraged or inverse ETF / ETNs, and volatility ETNs/ETFs if you sign a waiver. With an IRA account, you can trade options if are qualified if and if the trader is allowed between brokers. If you have a trading loss on your IRA you can only write it off on your taxes if you have liquidated the account and your distribution was less than the amount you contributed. On IRA accounts you need to remember that you cannot write off commissions on your trades. All of your dividends and capital gains will not be taxed which is very beneficial.
Strategies for retirement
Look, everyone has their own mix of what works for them and what doesn’t. Here at StockAbility™, we like to keep it simple. If you want to get complex, by all means. However, our students come to us because they want a direct and simple approach.
In our WealthAbilities Course, we focus on a few strategies and that’s it. What we find, or what I find as a coach, is that when you can master a few things first the rest tends to be additives.
Now the benefit is that we try to make it efficient as well. We incorporate some of the IBD 50 stocks as well as taking a longer-term investing view. We don’t teach the traditional buy and hold for 10 years but focus on 3 months to 12 months. Why is that? Well, in our view, it is much easier to look at a horizon that is shorter in time. Yes, it is a bit more ‘active’, however, we want to be conscious of retirement style investing. The passive ‘I only check my balance once a year’ model, while less stress, tends to be dated.
One of the things in addition to buying actual shares is using LEAP options. The idea that you can use less capital and hold a position on a stock for over a year (sometimes more) with the option to buy makes for, in our opinion, a valuable strategy for any retirement account.
I’ll be sure to talk more about this and what we teach in our WealthAbilities Course in one of our TakeStock Live shows soon.
Thanks for reading.
Daniel X. Bustamante