Trading · Trading

Trading or Investing in a Roth IRA to Minimize Taxes

If you’re trading stocks, taxes can seem like a nightmare. There is one really exceptional option for anyone who is actively trading or investing and making a good bit of money doing it: The Roth IRA. If you don’t have a Roth IRA, you should probably be looking into opening one. The tax benefits are amazing and this is a crucial consideration for anyone who has to deal with reporting capital gains income.

Roth vs. Traditional IRAs

A traditional IRA is funded with pretax dollars and your distributions will be taxed as ordinary income when it comes time to retire and cash in on your IRA. Contributions to a traditional IRA are tax deductible so you essentially avoid paying tax now but have to pay later.

A Roth IRA is funded with after-tax dollars so your distributions are tax-free as long as you wait until retirement age hits to withdraw money. So, pay the tax upfront and avoid the tax later in life.

At first. it might seem like the difference between a traditional and Roth IRA is just when you pay the taxes but there’s one really important detail to consider. These are investment accounts. The money you put into them is expected to grow over time. With a Roth, your account balance can grow from trading or investing and you aren’t going to pay a cent in taxes on that money when it comes time to take disbursements in retirement. You could, in theory, open a Roth IRA, fund it with $1000 and have that invested well so that it is worth $100,000 when you retire. Now, you’ve got your work cut out for you if you’re trying to turn $1000 into $100,000 via the stock market, but that’s not the point. The point is that you fund the account with the initial $1000 that’s already been taxed. Your tax obligation on that money has been fulfilled. When you take money out of your Roth in retirement, you will not be paying taxes on the $99,000 you made with your savvy investing or trading. In a regular brokerage account, that difference would be considered capital gains and taxed accordingly based on your tax bracket. In a traditional IRA you’ll pay as you take those disbursements.

What You Can’t Do in a Roth IRA

While there are differences from broker to broker, there are a few things you can’t do in any Roth IRA. You can’t hold collectible or tangible assets like precious metals or artwork. You also cannot engage in any type of trade that requires margin. So no short selling and a lot of options trading is off the table, too.

But if you want to day trade stocks, that’s perfectly fine. Buy and hold high-yield dividend stocks, ETFs, or REITS? Perfectly fine.

Self-Directed IRAs

Most people aren’t up for the challenge of managing their own investment accounts. But that doesn’t mean you can’t have a Roth IRA that is growing. If you are the type of person that has the knowledge and skills to navigate the stock market in a profitable way, then you absolutely need to be using a Roth for at least some of your trading or investing. Trading is a lot of (stressful) work so you should be considering your tax obligations in your trading plan. A lot of people have opened up Robinhood trading accounts and need to make quarterly estimated tax payments to the IRS because those are regular brokerage accounts.

I personally use WeBull for the majority of my day trading, and Charles Schwab for my buy-and-hold investments. Both offer IRAs that you can trade in yourself. With WeBull specifically, I have a standard brokerage account that I use for all of my day trade short sells. I occasionally trade options contracts and crypto in there, too. My WeBull Roth IRA is where I do my long side day trades and I hold some REITs for monthly dividend income as well. The combination of a regular brokerage margin account and the Roth IRA allows me to everything I want and build both current income and my tax-free retirement.

If you’re interested in opening a WeBull account, you can sign up here and earn two free stocks for doing so.

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