Reasons to Trade Stock in a Roth IRA

Roth IRA is a flexible retirement account that allows you to invest in different assets while offering maximum possible tax benefits. You can also include certificates of deposit, mutual funds, bonds and stocks in your Roth IRA investments. So, whether you already have a Roth IRA or you’re considering the option, it’s wise to know the rules, regulations and restrictions of Roth IRA investments.

Roth IRA Investment Options and Restrictions

Like any other retirement account, a Roth IRA has flexible limits on what you can hold as investment assets within your Roth IRA including stocks, bonds, ETFs, bank accounts, CDs, mutual funds, mixed asset funds and cash alternatives.

Depending on your retirement plans, you can have all of the Roth IRA investments listed above, provided your Roth IRA holder is offering them. Life insurance policies are not eligible holdings for a retirement account and you also cannot buy collectibles like gemstones, artwork, stamps and antiques. Certain tangible personal property types are also not allowed within Roth IRAs. Also, the institution that holds your retirement account should allow you to invest in the items that are allowed by the IRS.

Roth IRA in Stocks – What Makes it a Smart Money Move

The biggest advantage of Roth IRA investments is that all the asset gains are totally tax-free even if the withdrawals are made during retirement. Since stocks significantly appreciate in value with time, they make one of the most beneficial Roth IRA investments.

Even if you go by the trends, stocks have always offered greater returns in comparison to CDs, bonds and traditional Roth IRA investments. So, those who seek maximum growth for their retirement account can consider investing Roth IRA in stocks and make the most of tax-free gains.

However, buying only stocks is also not the best idea because your financial portfolio must always be diversified if you want to maximize your returns and minimize the risk. So, make sure your Roth IRA investments include conservative options in addition to bonds and stocks.

Rules Governing Roth IRA in Stocks

You can buy stocks using your Roth IRA but there are certain rules that you need to know. The most important regulation governing Roth IRA investments in stocks is the “3-day trade settlement rule”. According to this rule, unless your trading is restricted to a small amount of your overall balance, you are most likely to receive a “good faith” warning. So, if you are trading on a regular basis, keep your trades at least 3 days apart.

How to Choose Your Stocks Wisely

If you have the talent to pick the right individual stocks, you can enjoy spectacular returns on your retirement investments. One of the most time-honored tricks is to pick small-cap stocks. They have a significant upside growth potential as compared to large market capitalizations because they are out of favor with the current market conditions. However, picking individual stocks is not without risks because unexpected circumstances can make a sure shot winner fall to penny-stock status overnight.

Another proven long-term strategy is investing in dividend payers and protecting the dividend income by holding these high-growth stocks in your tax-advantaged Roth IRA.

Advantages and Disadvantages of Owning Stocks in Roth IRA

Investing your Roth IRA in stocks allows you to buy them and sell them for capital gains and enjoy dividend income without paying taxes. Neither do you pay taxes on withdrawals nor on the earnings generated by stocks if you wait until you turn 59½.

While a Roth IRA brings you the benefit of tax-deferred status and tax-free withdrawals, it is not without downsides. Unlike a taxable account that allows you to sell a high-performing stock, pay taxes on your capital gains and use the money the way you want, a Roth IRA levies a 10% penalty on your earnings over and above regular tax because you do not qualify for an exemption until you hit 59½.


The IRS does not tax the original contributions that you remove from your Roth IRA. For example, assume that you contributed $10,000 to your retirement account and used that amount to purchase stock. Imagine that your stocks performed well and turned into $15,000. Now if you withdraw $12,000 from your retirement account, the IRS won’t charge you any tax on your first contribution of $10,000, but the remaining $2,000 in your earnings would attract regular income tax. Also, depending on your unique situation, you would invite an additional early withdrawal penalty of 10%.

Author Bio:

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at or visit

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