Simple Roth IRA Question

[Guest Lukerk]

I'm a college student who recently started my Roth IRA. I'm wondering about is my ability to trade within the IRA. Can I trade the stocks i buy, or do i have to sit on them till I retire? I'm just confused, and wondering if I sell and use the money for another purchase in my IRA, will I have to pay taxes on the profits? Or is the the real advantage, where I can make 1000 bucks a year on good trades and not have to pay taxes? Any info would be helpful, thanks.

[John G]

Technical answer: if your IRA (Roth or regular) is at a brokerage, you can trade... every minute if you want... and you have no recordkeeping requirement (other than for your own internal tracking), no tax consequence at all with a Roth, and no tax consequence until you withdraw funds decades later with a regular IRA.

Should you trade stocks? Probably not for the following reasons: (1) your first priority is that diploma, (2) with a small initial IRA you do not have a lot of funds to buy/sell efficiently, (3) you do not have enough funds to give you diversification, (4) even low web based commisions will eat up your performance, and (5) you don't know enough to do a good job - the real world tuition of learning how to invest can be just as expensive as those greenbacks you fork over each semester to your college.

I would suggest that you pick one mutual fund. If you add more next year, you could pick a second. Look for broad based no load funds.

I would also recommend that you subscribe to a general financial periodical like Kiplinger to become more informed about investing. Think multiple-year process.

Finally, don't worry about the performance of your first investment choice. Don't confuse investing with Las Vegas gambling.... I alude to your 1000 bucks a year comment which would represent a 50% return on an initial 2K IRA. Not a likely scenario. Reward is ussually aligned with risk... so to aim for a 50% return means you are be betting on long shots (Cleveland makes it to the super bowl this year). My view is that your first few years are a learning lab and you need measure your increased skills/knowledge rather than your rate of return. You are very likely to become a millionaire if you contribute each year and only average a 10% return. Marry someone just as wise (and an early starter) and you can add "multi-".

You are to be congratulated for taking the first step so early in your lifetime. Good luck, and don't forget those grades!

[This message has been edited by John G (edited 10-21-1999).]