Can You Day-Trade in an IRA? Ross Cameron Shows You How

Your retirement money doesn’t have to just sit there attracting cobwebs all day. Did you know that there are certain types of retirement accounts in which you can actively trade? Warrior Trading’s Ross Cameron explains how.

A lot of people aren’t aware that it’s possible to actively manage the investments in their individual retirement accounts. Even fewer know that it’s actually possible to day-trade in them.

In the United States, an IRA is a type of pension account that’s provided by many financial institutions. IRAs provide certain tax advantages for retirement savings, because they hold investment assets purchased with a taxpayer’s earned income in trust until the taxpayer eventually reaches retirement age. There are two major types of IRAs: traditional and Roth.

Ross Cameron Explains IRAs

Traditional IRAs are funded with pretax dollars, which means you can deduct your contributions at the end of the year on your taxes. But when you start taking distributions during your retirement, you will be taxed at your ordinary income level.

With both traditional and Roth IRAs, restrictions relax at the age 59 1/2, when you can start withdrawing from your IRA penalty-free. In a traditional IRA, you will still owe taxes on the withdrawals of all earnings and any contributions you originally deducted from your taxes.

Roth IRAs, on the other hand, are individual retirement accounts that are funded with post-tax dollars and offer both tax-free growth and tax-free withdrawals in retirement. With Roth IRAs, generally, as long as you have owned your account for five years and you’re over 59 1/2, you can withdraw your funds when you want and won’t owe any federal taxes.

Another type of retirement account in the United States is a 401(k). These types of accounts are only available through an employer, and one of the biggest advantages of a 401(k) is that employees can make large contributions and deduct them from their income. It’s also usual for employers to make their own contributions to match their employees’, further growing the nest egg.

Self-employed people can open one on their own (because technically they’re their own employer). But opening a 401(k) involves a lot more red tape than opening a Roth IRA.

Some 401(k) plans let participants trade stocks and bonds by offering self-directed brokerage accounts inside the plan. But for professional day traders, the Roth IRA is usually the way to go.

If you leave your job — as many people eventually do when they have found their feet as day traders — you can no longer contribute to your employer’s 401(k). But the good news is you can roll your 401(k) into a Roth IRA if you want to.

 The Unique Benefit of Trading in an IRA

The key benefit of trading in an IRA, says Ross Cameron, is the advantage of tax-deferred savings and the potential for tax-free profits.

Ross Cameron explains, “With a Roth IRA you fund the account with post-tax dollars. This means you won’t be able to deduct your contributions on your taxes but — and this is my favorite part — when you go to take distributions during retirement, it is tax-free, which means all your gains throughout the years will not be taxed a dime.”

It seems strange that not everyone is taking advantage of this, but Ross Cameron said most people simply aren’t aware they can even day-trade in their IRA, even though some brokers actually offer IRA margin accounts, where you can trade on unsettled funds.

An IRA margin account is a retirement account that lets people trade on the unsettled funds of a trade — the settlement margin.

“When you place a trade and close it, you normally would have to wait T+2 days [two business days after the trade] for the funds to settle before you could trade with them again,” Ross Cameron explains. “But with an IRA margin account, you can use those funds right away. This means you can trade more and not have to wait till settlement.”

There Are Restrictions, Ross Cameron Says

The fact that you can trade in an IRA may be a revelation to some people, but it pays to know that there are limits to how much you can actively trade within an IRA — particularly day-trading.

For one, you can’t short stocks in an IRA and you can’t use leverage.

“But you can with an IRA margin account. Being able to utilize the settlement margin means you can trade on unsettled funds as much as you want, and you can purchase inverse exchange-traded products or buy puts on options, so there are a couple different ways to avoid not being able to short a stock or index,” Ross Cameron states. “And you can also trade derivatives in your IRA brokerage account. Most of the rules allow for the buying and selling of vanilla futures and options, but not the writing of naked futures or options.”

The Biggest Benefit Is Avoiding Tax, Said Ross Cameron

By far the biggest benefit from trading in your retirement account, says Ross Cameron, is the ability to avoid paying taxes on the gains.

“Taxes on any capital gains in your IRA account will either be deferred, in the case of a traditional IRA, or avoided, in the case of a Roth IRA, where you won’t pay any taxes on gains. That is huge and why trading in an IRA can be so beneficial,” Ross Cameron explains. “Right now, short-term capital gains are taxed as ordinary income, which can be a lot if you are in a higher income bracket.”

Actively managing your retirement account is a great way to grow your account while avoiding heavy tax burdens that nonretirement accounts have, Ross Cameron concludes.

“You won’t be able to use the money you make until you reach retirement. But the amount you will get to save in taxes will be well worth the wait!”

Disclaimer: The information provided in this article is for educational and informational purposes only and should not be construed as financial advice. The content is not intended to provide specific financial, investment, tax, legal, or accounting advice. You should consult with a professional financial advisor to determine what may be best for your individual needs. Trading in financial markets involves risk and is not suitable for all investors. Past performance is not indicative of future results.