Should You Trade In A Roth IRA? (2024)

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If you’d like to actively trade in a regular brokerage account, one drawback is that you owe taxes every time you sell an investment for a gain.

On the other hand, a Roth individual retirement account (IRA) can eliminate taxes on your gains as long as they stay in the account, making it an appealing alternative. However, even though it is possible to actively trade in a Roth IRA, there are still some drawbacks to consider.


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Roth IRA Tax Rules

A Roth IRA is a retirement investment account with tax advantages. You contribute after-tax dollars to a Roth IRA, which means the IRS considers you to have already paid taxes on the money in your Roth IRA.

This means you can withdraw your initial contributions at any time tax-free, and your gains aren’t taxed if they are withdrawn after retirement. As long as your Roth IRA has been open more than five years and you’re older than 59½—no matter how often you bought and sold investments in the account—you do not owe taxes on any of your gains.

The flip side to this is that you don’t get a tax deduction when you sell investments for a loss. When you trade in a brokerage account, you can deduct your investment losses against your gains through tax-loss harvesting. If you have more losses than gains, you can deduct up to $3,000 per year against your personal income taxes. You don’t get this tax break in a Roth IRA.

Taxes on Trading in a Brokerage Account

With a taxable brokerage account, you owe capital gains taxes every time you sell a stock, bond, exchange-traded fund (ETF) or any other investment for more than you paid. You owe this tax even if you immediately reinvest the money.

Active day traders who buy and sell investments frequently owe more capital gains taxes. You also owe income tax yearly on your investment income, like stock dividends and interest from bonds. Trading in a Roth IRA avoids these ongoing taxes.

Investments Allowed in a Roth IRA

You pick what investments to make in a Roth IRA. It’s not like a workplace retirement plan where your employer sets the selection. A Roth IRA allows nearly any investment permitted in a regular brokerage account as well, including:

  • Stocks
  • Bonds
  • Mutual funds
  • ETFs
  • Options
  • Real estate investment trusts (REITs)
  • Commodities
  • Cryptocurrencies

The only assets the IRS does not allow in a Roth IRA are life insurance and collectibles, like rare coins and artwork. The broker overseeing a Roth IRA may have its own rules and restrictions for what’s allowed for trading in this type of retirement account.

Roth IRAs do not allow you to trade on margin, where you borrow money from your broker to make investments. Some brokers do allow something called “limited margin” for IRAs. If you qualify, you are allowed to trade funds for trades that haven’t settled yet. For example, you may have cash pending from selling a stock, but it’s not in your account yet.

In this instance, you get a little earlier access to your money for trading, but it’s not the same thing as borrowing. This removes one popular trading strategy from your toolkit if you use a Roth IRA.

Roth IRA Contribution Rules

The IRS limits how much you can put into a Roth IRA annually. As of 2023, you can contribute up to $6,500 per year into this account if you are younger than 50 and $7,500 per year if you are 50 or older.

The IRS also has income limits for who can contribute to a Roth IRA. In 2023, you can only add money to a Roth IRA if you are single and have modified adjusted gross income (MAGI) below $153,000 or are married and have a joint MAGI below $228,000.

If you earn more than these limits but already have money in a Roth IRA, you can keep trading it. However, you can’t directly contribute any more money to your Roth IRA.

With that being said, you can sidestep these income rules through something called a backdoor Roth IRA.

Using this strategy, you put after-tax dollars into a traditional IRA, which doesn’t have income limits. You then convert the traditional IRA into a Roth IRA. You don’t owe any taxes for this move, and you get around the income rules.

Setting Up a Roth IRA for Trading

Setting up a Roth IRA for trading is simple. You just need to open an account with a broker offering a Roth IRA. Once you set up your account, you can log in and link your bank to transfer money.

From there, you can use the brokerage platform to buy and sell investments for your Roth IRA. The interface and process should be the same as investing through a taxable brokerage account.

For ideas on where to go, check out our roundup of the best Roth IRA accounts.

Roth IRA Withdrawals

Since a Roth IRA is a retirement account, it’s supposed to be for long-term investments. You can withdraw your contributions at any age without taxes or penalties. However, you can’t take out your gains tax-free until you have turned 59½ and it’s been more than five years since you first contributed to the Roth IRA.

If you take out your gains before hitting these milestones, you owe income tax plus a 10% early withdrawal penalty.

There are some exceptions where you can make early withdrawals without the penalty, such as to make a down payment on your first home, to pay for medical bills or because you become disabled. However, you still owe income tax on these withdrawals.

In addition, if you take money out, you still need to follow the annual limits for putting money in. If you’re under age 50 and you take out $20,000 from your Roth IRA, it will take more than three years to put it back in because of the $6,500 annual contribution limit.

Advantages of Trading in a Roth IRA

  • Avoids taxes on gains. One significant advantage of a Roth IRA is that you avoid taxes on all investment gains while they stay in the Roth IRA. This includes capital gains, dividends, interest and other investment earnings.
  • Tax-free retirement withdrawals. If you keep your money in a Roth IRA until you turn 59½, you can withdraw your gains tax-free. By trading in a Roth IRA versus a brokerage account, you can avoid taxes on years of gains.
  • Allows most brokerage account investments. By law, a Roth IRA allows nearly any investment permitted in a regular brokerage account. If your current broker doesn’t offer the investment you want, you can transfer your Roth IRA to another company that does.

Disadvantages of Trading in a Roth IRA

  • Limits on contributions and withdrawals. A Roth IRA is not as convenient for taking money in or out because of the IRS rules for contributions and withdrawals. You have a lot more flexibility using a brokerage account.
  • No tax deduction for losses. You cannot deduct your trading losses from a Roth IRA against your other investment losses and other income. You miss out on tax investment strategies, like tax-loss harvesting, where you look for ways to get deductions in your portfolio.
  • No margin trading. Margin trading can lead to substantial trading gains as you borrow money for your positions, though the losses will be even higher if your trade doesn’t work out. This high-risk, high-return strategy is not allowed in a Roth IRA.

Should You Actively Trade in a Roth IRA?

If you want to trade with your retirement funds, a Roth IRA does offer considerable tax benefits over a brokerage account. Between delaying taxes on your gains and the option for tax-free retirement withdrawals, your after-tax return can be significantly higher using a Roth IRA. Just be sure that you’re investing for retirement and not for short-term goals, given the withdrawal restrictions.

Before actively trading in a Roth IRA, remember that it is very difficult to outperform the stock market. More than 75% of day traders quit within two years because of losses and the challenges, according to a University of Berkeley study.

It could be simpler and more profitable to buy and hold long-term investments, such as a target-date fund designed for retirement. But if you are committed to actively trading with your retirement savings, a Roth IRA can be tax-effective.

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