by | Oct 26, 2020 | Definitions

Last Updated: October 26, 2020

Disclosure: Our content isn't financial advice. Do your due diligence and speak to your financial advisor before making any investment decision. We may earn money from products reviewed. (Learn more)

The Internal Revenue Service (IRS) has imposed few restrictions on what can be held within a self-directed IRA (SDIRA), making this type of retirement account is a popular choice for investors. Stocks are one of the multitudinous assets allowed in self-directed IRAs. That said, the question that arises is what then, are the advantages and drawbacks of trading stocks held within an IRA? In this article, financial experts discuss 9 tips to consider when trading stocks in your IRA.

Factors To Consider When Researching And Choosing Stocks

Deciding what stocks to invest within your IRA can be a daunting prospect in the first place. Here are a few factors to consider when researching and choosing which stocks to hold in your IRA.

First, gather the financial statements of all the companies that you are interested in – this is crucial when researching and selecting stocks. By law, the US Securities and Exchange Commission (SEC) requires all companies to submit 10-K and 10-Q forms. A 10-K outlines a specific company’s annual performance, while a 10-Q details quarterly performance. These reports can easily be accessed on your broker’s website, or conversely, be found on business news sites.

When looking at a company’s financial statements, investors are advised to pay close attention to components demonstrative of profitability levels such as net income,  return on assets (ROA), the price-earnings ratio (P/E), earnings per share (EPS), and return on equity (ROE). 

In addition, every popular online brokerage provides comprehensive stock research tools, which are imperative when choosing stocks.


Frequent Trading Will Drive Up Trading Costs And Potentially Lead To Underperformance, And You Must Trade Using Cash, Not Margin


Advantages of Trading in an IRA

Trading inside of an IRA carries significant tax advantages relative to taxable brokerage accounts. Namely, you will not trigger taxable events by trading stocks. In a taxable brokerage account, by contrast, any trade you make will trigger a gain or loss which will directly impact current year taxes.

Avoiding tax implications on trades is the biggest advantage of the IRA. However, just because you can trade frequently without tax implications doesn’t mean you should. Choose a strategy that aligns with your financial goals and stick to it. Frequent trading will drive up trading costs and potentially lead to underperformance.

Disadvantages of Trading in an IRA

There are some disadvantages of an IRA relative to a traditional account for trading. Notably, you must trade using cash, not margin (a loan). While I advise ALL investors to avoid trading on margin, this does have a more direct implication when it comes to day trading.

If you wish to day trade, you need a margin account (even if you’re not buying on margin). This means you cannot day trade inside of an IRA. However, again, I encourage you to avoid frequent trading in your IRA.

There are some other nuances to trading in an IRA, but the most important thing to know is that no matter what trades you make, you will not incur a taxable event inside of your IRA.”

Connor Brown, Founder, After School Finance


Two Reasons Why Trading Stocks In An IRA Can Be A Bad Idea For Some Investors

How is trading stocks in your IRA a bad idea? The reality is that most people who day trade stocks don’t do it very well, and while it can be fun, it is very risky. The first reason that trading stocks in your IRA is a bad idea is that it allows you psychologically to give yourself a pass on the fundamentals of saving, planning, and taking a diversified approach. If you are disciplined to be able to do that while trading single stocks, you are well above the majority of people. 

The second reason that trading stocks in your IRA is a bad idea, is that you can’t get the same diversification as using mutual funds or ETFs without spending a lot more money. To purchase single stocks of every company just on the S&P 500 would most likely cost millions. So by purchasing single stocks, you are taking a risk that you guessed correctly on the ones that will grow the most.”

Andrew Cremé, MBA, AIF®, Financial Planner, Raymond James Financial Services, Inc.


Be Aware Of The Restrictions Like Not Selling Short, No Free Riding, And You Can’t Buy And Sell Stocks On The Same Day

“Trading stocks is the best vehicle you can use when you have an IRA. This will defer the tax you might get from gains and dividends incurred when trading stocks. That income won’t be taxed now and will later be taxed when you take out the money from your IRA. By then, your tax percentage will be meager since you’re already retired and don’t have any other income anymore. Also, there are lots of restrictions when trading stocks using an IRA. These include not selling short, no free riding, and you can’t buy and sell stocks on the same day. If your financial adviser is worth his salt, then this won’t really matter at all. He should be able to navigate through this and increase your net worth.”

Michael Miller, CEO, VPN Online Multimedia Inc.


Invest In Berkshire Hathaway In Your Regular Account, And If You Must Speculate, Trade In Your IRA

“What’s down is up and up is down. Logic would suggest that an IRA would be the platform for long-term investing and a regular account would be conducive to trading. However, once taxes are considered, that logic is reversed. While I am not an advocate of trading for most investors, if you must trade the proper place is in a tax-deferred account. Capital gains, and any dividends, for that matter, aren’t taxed until the funds are withdrawn from an IRA. In a normal, taxable account any realized gains and losses are taxed at one’s marginal rate. The only transactions taxed in an IRA are when distributions are realized and usually, that means the retiree is in a lower tax bracket when they are working. So, invest in Berkshire Hathaway in your regular account — it pays no dividends — and, if you must speculate, trade in your IRA.”

Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University


Unlike other retirement accounts, self-directed IRAs can hold a myriad of assets including stocks. Because these investment vehicles are tax-advantaged, capital gains and dividends from stocks aren’t taxed, thus creating greater potential for growth. Yet, as discussed by the financial experts, there are likewise disadvantages to trading stocks in an IRA that must be taken into consideration. Here is our top 5 investment newsletters so you can get a better understanding of the available choices and major trading strategies offered by these financial newsletters.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.