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Individual Stocks/Stock Options from ROTH IRA account


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Guest investorforlife

I just opened, contributed and transferred some of my ROTH IRA

mutual fund to a brokerage account.

I would like to know if I make profits (capital gains) meaning selling

individual stocks, options, mutual funds or dividends/interest rates,

are they taxable even I have not withdrawn/distribution from

the brokerage account.

What about wash sale rule and 3K loss for the year does that apply

as well for ROTH IRA-retirement accounts, maybe only if withdrawn

earlier or before 59 1/2 years old?

I would appreciate any comments, advises and suggestions on this matter.

Is buying individual stocks/stock options/possibly selling short a good strategy to make on ROTH IRA accounts to save paying taxes, of course when

only realize a capital gain?

JG

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IFL - you need to do some basic reading on Roth IRAs. There are no tax implications to transactions within the Roth account. Under standard retirement withdrawals, there are no taxes on Roths either.

Your other questions are not especially clear, and may be linked to a misunderstanding about taxes on transactions. You may want to repost avoiding compound questions.

On options: your custodian will set the ground rules on any options. Generally there are only a few types of options allowed . . . such as covered calls, and not all custodians will even allow these. Since you can not just add money to a Roth, no custodian I know will allow naked options or any type of option that exposes your account to unlimited liability. I know of no normal Roth custodian that will allow a short sale.

I highly recommend that you do some reading of IRS pub 590 and perhaps tax season articles on Roths that you will find in all the financial mags in a few months. Most folks are well advised to avoid "gimmick" style investing in Roths. You don't need to bet on long shots, complex strategies or highly risky investments to achieve outstanding results when you are investing for many decades in a Roth.

When I review the investment decisions and approaches of folks - I find that bad results are heavily correlated with investments that are not well understood. It concerns me that you are wondering about "wash sales" when you don't yet understand the basics of a Roth. That is sort of like worrying about what is the best pitch count to steal home when you have not mastered getting a single.

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I agree with John G. You should learn about investment first, before you start buying individual stocks and bonds. If you don't even understand how a Roth IRA works -- and there are numerous sources on it, including Fidelity.com, Fool.com, and RothIRA.com -- it is unlikely that you understand stock investment. Until you've read some of the seminal works on investing, like Common Stocks and Uncommon Profits and Security Analysis (or The Intelligent Investor), you shouldn't consider investing in individual stocks, not anymore than the layman would consider trying to write a computer program in C. Once you do understand the fundamentals of both value and growth investing (and thus will obviously have an idea as to how to combine them), you should then only invest to the degree that you have the time to make intelligent decisions.

Most people work 40 hours a week, 8 hours a day, at least. They also sleep 8 hours. That leaves only 8 more hours. Of the remaining 8 hours, about 2 hours will most likely be used on daily activities that must be done every day (small things like eating, showering, etc). Of the remaining 6 hours, speaking optimistically, people have time for leisure, or whatever they please. Anyone wishing to invest in individual stocks must understand that the effort needed to invest will eat up substantial portions of that time, and that's only to get one or two stocks that are of decent prospects. How many people are willing to give up the time they would spend relaxing, spending with family or partner, or just reading leisurely to pour over financial statements and actively pursue the business grapevine by personal interviews?

Investing takes time. Speculation, on the other hand, can be done with the aid of a computer program and a couple of minutes a day. The poor results that proceed from such are predictable.

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Guest investorforlife

Thanks for all the quick, informative and educated replies. Appreciate them! ;)

Since there are no tax implications within ROTH IRA (buy&sell) then this is absolutely a tax sheltered investment opportunity. I guess where I'm coming from is the TAX INCENTIVE from the ROTH IRA vs the regular brokerage and mutual fund accounts.

I've been fortunate enough to know and apply this past 3 years to survive the downtrend, by following William O'neils CANSLIM methodology, reviewing different kinds of chart patterns(technicals as well as fundamentals) and an avid reader of Bernie Schaeffer's stock options strategies. Thanks to these experts for their experiences.

If Uncle Sam takes the bite out of my regular account's profit then I should definitely apply what I'm practicing with my regular to my ROTH IRA accounts.

Wow, this is an eye opener. I just hope that there is no string attach with the FEDS and congress will not change the current ROTH IRA law.

Thanks fellow ROTH IRA investors for your insights and (+/-) comments.

:rolleyes:

Investorforlife -> ex-computer programmer, now a humble POSTMAN/Trader/Investor

***** Benjamin Graham, Peter Lynch, William O'neil, Warren Buffet and Bernie Schaeffer are definitely the gurus in the investing world...

Oh yea, Financial planner would say reading just one new book a year on finance and investment puts you ahead of most people. A good reminder for all newbies and long-time investors.

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Before trading options you should check the CBOE website for info on what options trading is permited for IRAs since IRA assets cannot be used as collateral for margin loans and some options require that the account holder be personally liable for losses. These activities are regarded as prohibited transactions which will disqualfiy the IRA /and result in penalty taxes. Also I dont know of any brokerage that allows short selling on an IRA.

mjb

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Guest investorforlife

FYI

About brokerages, I've e-mailed both BrownCo and Ameritrade/Datek

about using funds from ROTH IRA account:

Brownco - according to them, they allow buying and selling call, put

option as well as selling covered calls and sell cash covered Put options.

Ameritrade/Datek - awaiting for their reply...

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Guest investorforlife

Here's the answer from AMERITRADE/DATEK brokerage,

"the only option activity that is allowed in an IRA account is the writing of

covered calls".

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  • 2 weeks later...
Guest forprofit2003

Have you heard? Buy and hold is no longer the most profitable market strategy! Making money in today's markets requires active trading and market-timing.

An article by Suzanne McGee in the Financial Times points out that markets have become more volatile, less liquid and more driven by short-term thinking.

According to one market analyst quoted in the article, "We're witnessing the death of long-term investing. Long-term thinking and long-term investment strategies aren't being rewarded by the market."

Tobias Levkovich, US strategist at Citigroup's Smith Barney division, was quoted as saying investors have to do more than just shift away from style-based or sector-based investing toward stock-picking. "Investors have to change the way they think about stocks."

So with that said, using ROTH IRA accounts is definitely a tax incentive in both

short and long term trading.

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We have heard this manta before from the same people who profit from the trading of securities. If active trading is so profitable, why do 70% of professional managers fail to beat the indexes in any given year. How does an individual investor beat those odds? This sound like a replay of day trading.

mjb

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Guest forprofit2003

70% of those professional managers or THE INSTITUTIONS don't have

the luxury of the individual investors in terms of LIQUIDITY. Is it it takes

time for the big boys to unload their shares, so by the time they are out

the security that they are holding goes to FREEFALL...

Let me ask you both APPLBY & MBOZEK, what are your strategies in todays

market and please be specific? Are you a Warren Buffet (Long term investor)

or William Oneil (Short term investor - 3 to 9 months) or Tony Oz (Day Trader)?

Also, APPLBY what is CISP,CRPS underneath your message?

Commissions, slippage and tax expenses/SEC fees are all part of investing

in the market. NO PAIN NO GAIN.

After reading Dr. Alexander Elder's latest book entitled "Come into My Trading

Room", with the principle of 3 Ms - Mind, Method and Money -

trading psychology, trading method and money management, it looks to me

using ROTH IRA account for trading purposes is definitely a good place to

keep profits to ourselves from uncle sam.

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Brownco -  according to them,  they allow buying and selling call, put option as well as selling covered calls and sell cash covered Put options.

Just to clarify, no doubt what Brown & Co. is saying is they allow buying calls/puts and then selling these long positions. No way they allow you to take unlimited risk selling naked calls in a Roth IRA. My Fidelity Roth IRA doesn't even allow cash-covered puts, but I think that's more a system limitation on their part than a deliberate decision.

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Guest forprofit2003
Commissions, slippage and tax expenses/SEC fees are all part of investing

in the market.  NO PAIN NO GAIN.

I actually thought the pain from investing came when there was no gain.

WDIK, you are ABSOLUTELY CORRECT! On top of no gain from your

investments yea we have commissions, slippage and fees which are DEFINITELY

pain in the neck... well you can always invest on those brokerages (such as

AMTD & ET) and use the profit to pay for the expenses in trading. ;)

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Forprofit2003 - it sure looks like a lot of your investment knowledge comes from books. I partly agree with one part of what you said, there is a certain acceleration of events in our economy that means you must re-evaluate your investments more often.

My father grew up in a world where many people worked for one firm for their entire life. In his case it was the Bell Labs, AT&T. At mid-century, a series of very successful firms emerged that dominated their catagories for many decades. ATT, Dupont, IBM, Xerox, GE, Catapiller, and Kodak were some of these companies. They were reliable stocks. The investment simpleton of that era would say - "buy these and forget about them". For decades that did indeed work. But by the 1990s many of these firms fell victum to changing times. Kodak was slow to see the impact of digital photography. IBM stuck with "iron" and tossed the software part of PCs to Microsoft. Xerox was slow to react to competition. Etc.

I think that multiple decade ownership of the blue chips is no longer a great strategy. This is not to say that short term trading is the way to go. On the far other end of the spectrum are the day traders. Most do not make money. Daytrading for all but a few very bright folks is more akin to gambling. It is high stress, takes up enormous amounts of time, and is probably addictive.

My 20+ years of investing experience tells me that no one style of investing is successful all the time. I don't recommend what I personally do to others because most folks don't have my mix of skills, available time, or tolerance for risk. Note, I did not mention transaction costs since the arrival of discounted internet trading, where some trades are just $5, has made minimized that issue.

To suggest that average folks be more active traders, such as the 1-6 month holds, is to presume that folks have the skills, time, insight and courage. It is my experience that the average investor is not that advanced. Folks that have jobs can not be expected to be reacting to corporate announcements, listening to earnings calls, reacting to CNBC clips, and doing research on competitors. When someone asks me to comment on their investments - I will ask what does the company do, who is the CEO, what is the recent earnings growth rate, who are their competitors, where are they located. Way too many times I will be luck to get one of those questions answered. Then I learn they bought it because a co-worker owned it or a relative suggested it. I call that investing on "tips" and it is extremely foolish. To the relatively new investor reading this I will ask - "Are you prepared to spend 16+ hours researching a firm before you take a position? And follow that up with 4+ hours every month?" If the answer is no, then you probably do not want to be a short term stock picker. If you are unlikely to have the discipline to sell a bad idea and move on... you will never be a good stock picker.

Two other reasons why shorter term trading is limited for most folks: (1) Many people have a false sense that it is possible to detect the change in direction in a stock or the market. It is almost impossible to know when high is high and low is low. After perhaps 3,000+ trades over 20 years, I can tell you that only once did I buy a stock just as it turned around.... and it was purchased for my mother and not me. (2) It is too easy to get emotionally attached with your stock pick. Investors often hold losers too long and collect gains on winners too soon. Ask most serious investors what they could do to improve their results and they will tell you that "timing of sells" is a huge area for improvement.

What do I believe in? For most folks getting started and the majority of the folks who are likely to read this response - I think broad based index mutual funds are just fine. Stock picking is great if you enjoy it, can sleep nights, have a tolerance for mistakes and don't mind the amount of time it takes. Long term or short term? That depends upon the investment, no fixed rule applies. It also depends upon your tax bracket and if the investment is within a tax sheltered account.

Summary: no one style of investment works all the time, not all approaches to investment match the temperment/training of the investor.

What style have I adopted?

No fixed style. What I do has continuously evolved. I focus on stock picking for most of my assets, but not all. Small accounts - like kid's Roths, my wifes smaller 403B don't have the assets or brokerage commission structure to justify individual stocks.... so each has a different no load mutual fund. Larger retirement accounts and taxable brokerages are mostly stock picks. About 1/2 of these assets are in stocks held for 1-5+ years... which is ussually about the time required to capture the expected appreciation. About 25% of my holdings are aimed at shorter term opportunities, 1 week to 1 year. Some times, I may have 20% of my assets in very short term opportunities - hours/days type transactions, but those opportunities are not just hanging there like grapes to be picked. I act on less than 1 in every 6 ideas I research. I am very willing to make a modest trade (a market overreaction to JNJ press announcement.... and some more complicated deals) to capture a 5 to 10% gain. About two times a year, I will have a strong urge to short a stock that is out of whack. My shorts are rarely held for more than a week. I might have up to 25 positions or as few as eight in my portfolio. I try to stay mostly invested - but for brief periods I may be using margin or as much as 80% cash. My investment skill is self taught, and I learned many lessons the hard way, paying a "tuition" many times what my two degrees cost. I also have developed expertise in two very narrow market niches where I have a distinct advantage over the average analyst. I will frequently violate almost every "rule" that has ever been written in basic investment texts. I spend about 30 hours a week on investment analysis. Most folks would say I am a professional investor.... I think of myself as retired. My long term record is 16 strong years, 2 flat, 2 slightly negative.

Worth repeating:

Summary: no one style of investment works all the time, not all approaches to investment match the temperment/training of the investor.

I don't attempt to recommend that others try to follow my path. It works for me but is unlikely to work for others.

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A PS: Leave "no pain, no gain" to the sports page. It is a silly slogan that makes little sense in investing. You don't need to have pain to have gain.

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Guest forprofit2003

John G, thanks for your knowledge about the market and for sharing your strategy and experiences to this message board. I sure hope that there will be others in this board who would do the same (truthfully - what works and what doesn't and what lessons learned), so that we all know where they are coming from when posting messages on this board.

For me, "NO PAIN, NO GAIN" slogan IMHO relates to any endeavor of human lives. We can't change the fact that investing in the market is also a GAME and MIND sports for some people. Everyone makes mistakes and go through the University of HardKnocks especially mentioning about what had happened in the past 3 years (2000 - 2002). I'm pretty sure a lot of folks out there didn't even wanna talk about their retirement investments such as 401k/IRA or their individual holdings 'coz THERE'S A PAIN in which I believe you need to have pain to have gain (i.e. intense training in the military service, talk about PAIN however the harder the challenge the trainee becomes stronger physically, mentally, emotionally). Investors are holding on their losing stocks in hopes for a come back.... there are ways and strategies to ease that pain, one of them is by tuning in to Suze Orman. She seems to have all the answers. Her advises sounds too hard to handle and follow however it can be done...

I may only have 8+ years experience in the market (that is buy&sell of securities - 75%, call options (mostly writing covered calls) - 18%, a few put options & short selling transactions - 5% & futures contracts (e-minis & indexes) - 2%), but the best experience so far that I've learn is learning from my mistakes(PAIN) - excluding paper trades -and from others(PAIN) in which helped me stay in the course(GAIN) and hopefully until I retire and pass it onto the next generation. (Experience, training and education are your armor and shield to this brutal world of investments). It has been exciting and challenging experience. I like the FREEDOM of knowing the basics and the know-how of both investing and trading.

Getting back to the subject ABOUT ROTH IRA, I agree with the topic starter about using ROTH IRA as a mean to pay ourselves than UNCLE SAM and possibly using the same strategy from our regular account to IRA. "If Uncle Sam takes the bite out of my regular account's profit then I should definitely apply what I'm practicing with my regular to my ROTH IRA accounts." Quoted from investorforlife. Of course doing your own HOMEWORK AND FURTHER RESEARCH SHOULD GIVE YOU NO HARM BEFORE YOU THROW YOUR HARD-EARNED MONEY...

HAVE A NICE DAY/YEAR INVESTING FELLOW MESSAGE-BOARD MEMBERS!!! ;)

This is the year to make more profits or you can always use the 3K sell rule as an alternative strategy. BTW, Wash Sale rule and 3K sell loss applies only for regular account AND NOT FOR RETIREMENT ACCOUNTS such as ROTH IRA unless withdrawn all ROTH IRA assets before retirement. I believe no brokerages allows short selling on ROTH IRA account.

Also, Etrade allows writing of covered calls for option on ROTH IRA and will implement changes in the near future with government approval. ($9.99 base commission plus $1.75 per contract fee (no minimum charge)) for both POWER E*TRADE AND Regular accounts.

Any other brokerages both online and discount/full brokerages, please POST IT TO THIS MESSAGE BOARD as well as there option fees. I would like to know more about this too. Thanks!

CONGRATS PATRIOTS!

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I can not recommend Orman. Right now she most of her pitch is reactionary, playing to investor fears associated with the past three years. She cuts a lot of corners with her explainations and often leaves out important qualifiers. She is more of a TV personality than a knowledgable investment advisor. Her presentations are based to much upon slogans.

I also do not recommend that folks with limited investment experience fool around with options. This is akin to giving a youngster a jet plane when they were just learning to fly a kite. Options magnify the impact of decisions. The commissions and "spreads" are expensive. You can lose 100% of your investment in a single day.

Here is a good test to see if you should even be thinking of options. Answer the question "The average spread for an option typically represents what percent of an option price?" If you neither understand the question or don't know the answer.... then you are not ready to use options.

PS: Most of the authors on this message board have a background in tax law or accounting. They are generally not trained in investment analysis.

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Guest investorforlife

HERE ARE THE COMMISSION FEES FOR BOTH REGULAR & IRA/ROTH IRA

Equities: Options: Based on 10 CONTRACTS

MKT LMT MKT LMT

BrownCo - (<5K shares) $5 $10 $20 $25

Ameritrade - (Unlimited) $10.99 $10.99 $25.99 $25.99

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Guest investorforlife

ty07480 stated "no doubt what Brown & Co. is saying is they allow buying calls/puts and then selling these long positions. No way they allow you to take unlimited risk selling naked calls in a Roth IRA." I questioned this myself too

especially when they e-mailed me about allowing selling naked calls and other strategy of put options on ROTH IRA account. If they ever allow it, I would not

use it on my ROTH IRA account even their commission is low comparing it

to other online brokerages.

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I cannot imagine how an individual investor can have any advantage in investing in options when there are so many professionals to trade against. Individual investors do no have the time or dedication to constantly review all the financial information necessary to invest in options. They are much better off investing in less volitile investments such as index funds. You can get good advice on index funds by reading books by John Bogle, the founder of Vanguard funds. I have seen too many clients crash and burn because they fell for some investing fad such as day trading, tech stocks or momentum investing.

mjb

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Guest investorforlife

Well, this message board is getting interesting and informative besides the ROTH IRA topic.

John G wrote "Summary: no one style of investment works all the time, not all approaches to investment match the temperment/training of the investor."

Now my question, is there a consistent investment strategy/methodology for bull and bear market without knowing options & short selling strategies and not including CDs, money market, savings interest and consistent dividends from

blue chips, utilities and REIT equities.

One example: William Oneil claims that his CAN SLIM approach generated a 503% GAIN over the past 5.5 years (Jan 1998 to June 2003) without a single down year that is investing in small and micro cap stocks.

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Based upon my experience, the answer to your question is NO. There is no single strategy or hybrid strategy that fits different market conditions or economic cycles. Try not to believe all the self promoting hype you read. As the Beardstown ladies eventually discovered, most of the huge stats don't surivive close scrutiny. I doubt that even ONeil would claim any method can avoid down years.

Think of variations in investor knowledge, risk tolerance, available time, procedural constraints (like limitations in a company plan), and then consider how very hard it is to comprehend what is actually happening in our economy. Layer on how difficult it is to predict events even just a few years out - like Sept 11, bird flu, Mount St Helens, an NYC blackout, hanging chads, and other "surprises". You want one approach to investing that works in sun or rain, summer or winter, in daylight or dark? Its a huge waste of time to make such a search, the perfect approach to investing does not exist.

Markets are essentially by definition unpredictable. Voters are unpredictable. The weather is mostly unpredictable.... certainly when you talk about climatic cycles like drought. People are unpredictable. So.... does it not follow that investments which are derived from human endeavors would also be highly unpredictable? If everything can be known or predicted in advance then no one would ever hold a losing investment and we would overrun the best ideas. That is not how markets work. There is always a high level of uncertainty.

For the novice investor, the closest thing I can think of to a single approach to investing is to use broad market based index funds. The advantages: easy to purchase in dollar amounts, very diversified (at least among equities, aka stocks), low maintenance (fewer hours needed to monitor) and tiny loses related to expenses. They are no magic bullet - if the overall market goes down, you slide down too. They are often over weighted toward large corporations. You can still have bad fund manager behavior. Etc.

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  • 2 weeks later...

Let me be very clear about my view options investing. Not even 2% of the investing public has enough experience, mathematical modeling skills and patience to be using options. I have been investing for a couple of decades, and I rarely use options. I have four books on option strategies on my shelf. I have read them all. Maybe one or two times a year, I use an option strategy.

From the questions we see here, and the problems we are asked to address, it is clear to me that most people who read this message board should not be even thinking about options trading. After a couple of years of responding to questions here, it seems to me that most folks who post should not even be buying individual stocks, but sticking to mutual funds.

Custodial IRA/Roth accounts allow only the most limited forms of options investing. The "covered call" is a method of collecting a small premium to boost your returns by giving up any large potential upside. The downside to going this route is that you have a lot more transactions, spend more time on your investments, and if the market climbs you don't get much of the upside before your shares are gone.

The multiple posts about options are a big distraction. We need everyone standing up and taking first steps forward.... not trying to reach Mach 1. If you are new to investing, please take the last two sentences to heart.

There are no risk free approaches, no shortcuts to success, no miracle solutions, no ultra fast way, and no single style that works all of the time in investing. You develop investment skills over years (not hours) and you need both patience and time (decades) to achieve your investment goals.

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