Self-Directed ROTH IRA and Capital Gains Taxes

[Guest Aspenman]

I'm interested in opening a self-directed Roth IRA account for myself, but I had a couple of questions that I hope some of you can help me with.

If I trade primarily individual securities (listed stocks on the exchanges), how are capital gains taxes handled within the account? Do I have to pay capital gains taxes if I sell a stock after a sizeable gain? (obviously, provided that I keep all money within the Roth account).

Ex: Purchase a stock within Roth at 50 a share, sell the entire position at 60 a share, put that money into money market account or something equally liquid until buying the next stock. Provided that all of this money is kept in the Roth Account itself, is there ever a 'taxable event' here?

Thank you for your help!

[John G]

No taxable event. There is no difference between long term, short term gains, dividends, or interest. No reporting requirements either. Just keep the records you need to track your results.

Under normal circumstances, later in life, you should be able to take funds from your Roth without any taxes at that time either.

[Guest Aspenman]

To quote Montgomery Burns,

"Excelllllllllllllent, Smithers"

Thanks for the reply -- So, in essence, isn't the Roth IRA just about the best 'day-trading' account one could possibly hope for?

I'm actually not looking at a day-trading strategy, but I do want to open an account for stock-trading and love the idea of being able to avoid capital gains tax issues by simply keeping my money inside the Roth until I can take qualified distributions.

One more question: Inside the same Roth account, can you hold very different types of investments? I.E, can I hold funds, bonds, stocks, money markets, cd's, all inside the same roth account?

Many thanks for your help.

[ElGuapo]

So, in essence, isn't the Roth IRA just about the best 'day-trading' account one could possibly hope for?

yes, if you're good at it. But remember the flipside is also true--I can't tell you how many clients a year or two ago were calling me wanting to recognize losses in their Roths. Remember, no capital gains also means no capital losses.

If you're sorta undecided between Roth and traditional IRAs, and if you were serious about doing some truly speculative investing, you might even consider opening a traditional, see what happens for a year or two, and then if you did lose money you could convert it to a Roth later at the lower value.

Then again, speculating about what direction your account may go in the near term seems like a silly thing to base the traditional/Roth decision on. And yes, in answer to your last question, if you open a brokerage Roth account with someone like Fidelity or Schwab you should be able to invest in all those things, though I hope you see the wisdom in keeping the majority of your money in well-allocated mutual funds and just play around with what you can afford to lose.

[jevd]

Remember the annual contribution limits and qualification requirements as well.

$ 3000 a year may not be enough to accomplish what you want to do.

[John G]

Day trading? Oh how easy that rolls of the tongue.

The answer to your question has little to do with Roths and a lot to do with your personality, experience, available time, and investment savy.

Lets answer the Roth part first: transactions in a Roth do not have to be reported line by line like in taxable accounts, there is no distinction between long and short term holding periods. That might sound like a perfect place for trading. BUT - -As a prior poster noted, you can not easily write off tax losses. Add to that limitations on options, inability to use margin, inability to short stocks....

But the bigger issue is that if you no very little about Roths, I would bet that you do not consume financial material - otherwise you would know Roths well. Folks that do not heavily consume data, reports and financial statistics are not likely to be good traders. That you are not aware of the full range of tools traders use, and how you can't use them in a Roth, suggests that you are not likely to be good trader. By every study I have ever seen, about 80% of all traders are losing money.

For a few years, I was a trader. For a few years I ran a corp that focused on emerging companies and market swings. There was nothing in your post that even hints that you should be considering any kind of trading, much less day trading.

Oh how easy it rolls of the tongue.

Long term success in Roths is a lot like Notre Dame football of years ago. Each year (down) try to gain four yards (a 10+% return).

And, this post is no April fools joke.