Can you trade stocks inside retirement or ESA account?

[Nika]

I now have to look for a new place to open ESA, as TRowePrice no longer allows adding more money to even already existing ESAs.

Prior, I only had mutual funds in our retirement and ESA, but wouldn't it be great to use their tax advantageous status for trading inside the account? I'm not sure if there is a way to do that, and what would be the best way. I am not talking about day trading, but rather about buying or selling a stock once in a few months or weeks?

Mutual fund accounts are set up to limit your trading as much as possible (fees if you hold for less than 90 days, not allowing to re-enter the same fund for a certain waiting period, etc...). I wonder if they have massive restrictions on stock traiding inside the tax advantageous accounts?

If anyone knows of a cost-effective way to do something like that, please share.

[bjl584]

I buy and sell individual stocks within my Roth IRA all the time. I have to pay commission charges for buying and selling, but there is no tax consequence of any kind. It works the same way that it would if you bought individual stocks in a taxable account.

[disneysteve]

You can definitely trade stocks within an IRA/Roth. I have an account with Scottrade and have traded stocks in that account.

[MonkeyMama]

Yes - all our stocks are in our ROTHs.

You just open an ESA or a retirement account anywhere you can trade stocks.

Stock advantaged accounts are generally no more than a label. Admittedly, 529 plans and HSA plans are not very common and widespread at every financial institution. BUT, you can open an IRA pretty much anywhere. I'd think ESAs would be a close second for "can invest almost anywhere" and "treated no differently than any other account," except for the "tax label."

[KTP]

while not a big deal until you approach serious money, try to limit the amount of foreign dividend stocks in your retirement account.

Oh...now you ask, why? Good question.

Most foreign stocks that pay a dividend have a portion of that dividend taxed in the country of the company then the remainder is sent to you. You can claim this on your tax return for a credit (called a foreign tax credit), but if it is in a retirement account you can't claim diddly....you pay the tax and lose the credit.

I considered this when I bought a lot of Nokia (before they cut the dividend to 5.1% it had a payout of over 10%) and hold the shares in a taxable account.

One other consideration. Be carefull if you sell a stock for a loss in your taxable account and want to buy it in your retirement account. If you do this within the wash sale time period (30 days) you will cause a wash sale on the transaction and forever lose the ability to deduct the loss. Could be a very painful gotcha.

[Nika]

This makes me think to try a new approach.

Say I buy 100 shares of stock of a very large company with volitile stock. Each time it goes up by, say $3(I don't want to get too greedy here), I'd sell and make $300 (minus about $14 bucks in commission) than wait till it goes down again and do it over. If I can do it without any tax consequences, that would be sweet!

If it does not, I can wait unlimited time, and will not commit too much money, only a portion. My baby has a 17 year horizon, so I would only do it for the first year, in order to get a jump start and get more money than the maximum $2,000 into this ESA). I'm assuming that any money made from the proceeds of the sale are not counting against the maximum, only the original amount I invest into the ESA?

[KTP]

This makes me think to try a new approach.

Say I buy 100 shares of stock of a very large company with volitile stock. Each time it goes up by, say $3(I don't want to get too greedy here), I'd sell and make $300 (minus about $14 bucks in commission) than wait till it goes down again and do it over. If I can do it without any tax consequences, that would be sweet!

If it does not, I can wait unlimited time, and will not commit too much money, only a portion. My baby has a 17 year horizon, so I would only do it for the first year, in order to get a jump start and get more money than the maximum $2,000 into this ESA). I'm assuming that any money made from the proceeds of the sale are not counting against the maximum, only the original amount I invest into the ESA?

You just outlined the strategy I have been using for the past 3 months on Nokia. I have used up 40 of my 100 free wells fargo trades on this one stock, buying it and selling it 10 or 20 cents later, then buying it again. At any point it is a stock I am comfortable holding long term, as a matter of fact, I have 11,000 shares right now I am just holding. I won't buy more unless it drops back below $5.10 but I won't sell any until $6 now.

[disneysteve]

Say I buy 100 shares of stock of a very large company with volitile stock. Each time it goes up by, say $3(I don't want to get too greedy here), I'd sell and make $300 (minus about $14 bucks in commission) than wait till it goes down again and do it over. If I can do it without any tax consequences, that would be sweet!

That works, as long as the stock keeps rebounding. I've made a few trades in my SEP-IRA. I kind of consider that particular account to be play money. It is not my main retirement account so I use it for some periodic trading. My last trade earned me about $125 after commission. Not a lot of money but no tax consequences so it's pure profit.

[MonkeyMama]

@ Nika - you got it!

Not only is there no tax consequence, but it sure makes tax time simple when all the big stock trades don't have to be reported on your tax return. Simplicity! (100% the reason to do it this way is tax savings - but there are other perks).

[disneysteve]

Now the big question. What do you all consider to be some good stocks for doing this? They need to trade in a somewhat wide range, not 25 and 50 cent swings, but need to be solid companies that aren't likely to crash. The last company I did it with was a biotech that was a somewhat risky play.

[kv968]

This makes me think to try a new approach.

Say I buy 100 shares of stock of a very large company with volitile stock. Each time it goes up by, say $3(I don't want to get too greedy here), I'd sell and make $300 (minus about $14 bucks in commission) than wait till it goes down again and do it over. If I can do it without any tax consequences, that would be sweet!

If it does not, I can wait unlimited time, and will not commit too much money, only a portion. My baby has a 17 year horizon, so I would only do it for the first year, in order to get a jump start and get more money than the maximum $2,000 into this ESA). I'm assuming that any money made from the proceeds of the sale are not counting against the maximum, only the original amount I invest into the ESA?

That's a good plan, and doable, but I'd strongly suggest you also put a stop loss on the trade. Yes you may have a 17 year time horizon, but some stocks do fall and never recover.

If you thought you were sick to your stomach about not letting some of your Apple stock ride for a little more profit, that's nothing compared to having a stock drop 40% or more and you keep holding onto it "knowing it'll come back" and it never does. Just limit your losses.

And no, the proceeds you make on a sale won't count against the maximum.

[disneysteve]

That's a good plan, and doable, but I'd strongly suggest you also put a stop loss on the trade.

You could do a trailing stop order. That way if it drops from purchase price you're protected and if it goes up and then turns around, you get out before you lose the profit you've made, but if it continues to climb, you don't sell too soon and miss the run up. That kind of covers all bases.

[Nika]

Thank you! I just opened a ROTH account with Scottrade.

I have another tax related question for those who understand ROTH.

I've heard that you can withdraw ROTH contributions (not earnings) at any time without incurring any taxes or penalties. I never considered it (after all, it is for retirement) but now I am trying to understand...

Take this scenario:

I open a ROTH for 2012 with $5,000.

Lets say the trades were wildly successful and I doubled the money and made it into 10,000 (I know it is an insanely unrealistic scenario, I am just doing it to try to fully understand how taxes on this would work at a maximum level).

Than I can withdraw up to $5000 tax-free same year? (that was my original contribution)

Would this not be a way than to trade to my hearts content and withdraw the money, up to 5,000 without owing any taxes?

I

[jpg7n16]

Take this scenario:

I open a ROTH for 2012 with $5,000.

Lets say the trades were wildly successful and I doubled the money and made it into 10,000 (I know it is an insanely unrealistic scenario, I am just doing it to try to fully understand how taxes on this would work at a maximum level).

Than I can withdraw up to $5000 tax-free same year? (that was my original contribution)

Would this not be a way than to trade to my hearts content and withdraw the money, up to 5,000 without owing any taxes?

That's correct Pretty powerful huh?

But you can't go back and add that $5000 back in. You get $5k per tax year across all IRAs. If you use your $5k, then withdraw it, you don't get a new $5k. You've gotta wait til next year.

To answer another question you didn't ask: if you withdrew say, $6,000. $5k would be completely tax free. The extra $1000 would be taxed as ordinary income, with an additional 10% penalty.


Please tell me that you coded your contribution for 2011... you have up until April 17th to make 2011, and the whole rest of the year for 2012

[KTP]

how much are trades at Scottrade? You want to be paying less than $5 or so per trade to make this work well. If you had looked into my advice for Optionshouse, they also give you 100 free stock or option trades for opening a normal or IRA account with minimum $3000.