Tactical trading in IRAs
Executive Director, J.P. Morgan Wealth Management Product & Experiences
- Individual retirement accounts (IRAs) are generally used to save for retirement with a long-term outlook, but there may be an opportunity to maximize profits by tactically trading in your IRA.
- It is important to evaluate the risks of your investment strategies – especially for IRAs since the account may contain all or part of your retirement savings.
- Even if you decide to make short-term trades in your IRA, it is important to maintain a well-diversified portfolio across all your investment accounts.
Individual retirement accounts (IRAs) are used to save for retirement in a tax-advantaged manner with typically a long-term outlook. But if you already tactically trade in your taxable account(s), there may be an opportunity to better manage your taxes by tactically trading in your IRA.
Maybe you choose to allocate a certain percentage of your IRA assets for your tactical trading to purchase short-term investments that interest you. You don’t have to begin investing in your IRA with a lot of money – you can start small.
This may be your strategy if you have a desire to actively research and manage your account’s holdings for the shorter term while maintaining the tax-advantage benefit an IRA provides. All the while, you can have the rest of your account held in long-term investments, since it’s a good idea to remain diversified and hold long-term assets across your investment portfolio. It can be advantageous if the short-term investments that interest you are tactically traded within an IRA due to the tax benefits an IRA offers.
However, while there are opportunities to tactically trade in your IRA, there are also associated risks.
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Associated risks
While investing can be exciting, it is important to recognize that there are investment risks:
- Markets are unpredictable and can be volatile. History has shown it is extremely difficult to time markets and most investors do not do it well.
- Some newer investors who actively buy and sell stocks may not understand the capital gains and other tax implications of selling stock held for a short period in their taxable account – and may end up with significant tax bills
- Although not relevant to IRAs, the example of short-term capital gains tax illustrates the need for investors to be educated and consult with their tax professional about the associated tax implications for different types of accounts.
- Additionally, there is a potential for loss of retirement assets if a trade loses money. There can also be a limited ability to add more funds due to contribution limits.
Investing opportunities
An IRA is one type of tax-advantaged account that helps people prepare for retirement. Unlike in taxable accounts, in which you may be subject to realized capital gains tax annually, a traditional IRA is taxed as ordinary income only when withdrawals are made, and a Roth IRA may not be taxed at all. While investors should realize that IRAs have penalties for early withdrawals, they should also recognize that IRAs have tax advantages that are not available in taxable brokerage accounts. If a tactical trading strategy interests you, IRAs may provide tax efficiencies, especially if you do not withdraw your assets from the IRA early.
It is important to research and evaluate the risks of your investment strategies – especially those that may be riskier, such as tactical trading. This is important for IRAs since your IRA may be all or part of your retirement savings. You can usually choose to invest in a variety of exchange-traded funds (ETFs), mutual funds and stocks, among other options. Be sure to double check investment limitations since regulations and account restrictions can change at times.
Keep in mind that maintaining a well-diversified investment portfolio across all your investment accounts is an important aspect of your long-term financial health, including retirement planning. You should consult your financial advisor for planning investment strategies and review your tax situation with your tax professional.
To recap, here are things to remember if tactical trading is your strategy:
- Be sure to maintain a diversified portfolio across your investment accounts, including long-term investments.
- You can start small and allocate a percentage of your account for tactical trades.
- There are risks when you invest. Be sure to manage your risk appropriately.
- Understand your tax situation and how different accounts have varying tax implications.
- Do your research and ask questions.
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