Can You Day Trade in a Roth IRA?

You can pursue some active trading, but it’s not the best option

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Roth IRAs are popular retirement investing accounts due to the tax incentives they provide. Money contributed to a Roth IRA has already been taxed as income, then grows tax-free. When you make withdrawals during your retirement, you pay no taxes on the contributions or earnings.

This tax-free growth means investors want to earn the highest returns they possibly can while investing within their Roth IRA, which leads some to consider day trading in the account. However, Roth IRAs aren’t designed for day trading and you’ll likely be better off with other strategies.

Key Takeaways

  • Rules and regulations make it difficult to day trade in a Roth IRA.
  • You can’t use margin or borrow against your existing holdings in a Roth IRA.
  • Some forms of active investing are still possible in a Roth IRA, but most investors will be better off with a more passive strategy.

A Roth IRA Makes Day Trading Difficult

Day trading means buying and selling the same security, on the same day, using a margin trading account, which allows the investor to borrow against the value of their existing holdings. Day trading can include stocks, bonds, options, and other securities.

Someone who makes four day trades over a five-business-day period is a “pattern day trader,” according to the Financial Industry Regulatory Authority (FINRA). Pattern day traders are subject to additional requirements and trading rules. For example, they must maintain a balance of at least $25,000 in their account at all times. That makes day trading in a Roth IRA difficult because you can only contribute $6,000 to the account each year (plus an extra $1,000 a year if you’re age 50 or older).

Day trading is a way for traders to try to produce profit in the short term by making frequent trades. This is roughly the opposite of what Roth IRAs are intended for: long-term retirement savings. In fact, some Roth IRA rules make day trading in the account very difficult.

The primary rule blocking day trading in a Roth IRA is that Roth IRAs are cash accounts, and they don’t allow you to use margin to help purchase securities. This rule blocks people from using this type of account for pattern day trading.

Active Trading in a Roth IRA Is Possible

While the fact that you can’t trade on margin in a Roth IRA rules out day trading, that doesn’t mean all active trading in a Roth IRA is off the table.

Day trading has a very specific definition: A day trade only occurs if you buy and sell the same thing on the same day. If you hold a security overnight, it’s not a day trade. Similarly, you can make a small number of day trades without FINRA considering you a pattern day trader.

This distinction means you can make very frequent trades without falling afoul of day-trading rules.

Other types of active investing, which can involve holding securities for a few days or weeks at a time, also won’t break these rules. Some brokers even offer “limited margin trading” for IRAs, letting you trade using unsettled cash from sales—as long as you meet eligibility requirements.

These active strategies can be appealing because Roth IRAs serve as a tax shelter. In other accounts, frequent trades can generate significant tax liabilities, but you won’t owe taxes on gains in a Roth IRA—meaning you can capture even higher returns.

Passive Investing Is Usually a Better Choice

Despite the fact that you can trade actively in a Roth IRA, the reality is that passive investing is usually the better choice for most investors. One reason is that beating the market, especially over the long term, is incredibly difficult. One analysis of the past 20 years found that only about 5% of actively managed U.S. funds beat the returns offered by the S&P 500 as a whole.

Another drawback of active trading in a Roth IRA is that you can’t deduct losses from bad trades due to the tax-sheltered nature of the account.

In contrast, investing in passively managed index funds is low cost and tends to offer strong long-term returns. This investment strategy also reduces the impact of trade commissions and other fees your broker might charge.

Because Roth IRAs are intended for long-term retirement investing, you don’t need to worry as much about short-term losses. You can weather short-term volatility as you aim to capture long-term returns.

Should You Day Trade in Your Roth IRA?

Day trading in a Roth IRA is difficult to do because of the restrictions on using margin in retirement accounts and FINRA rules regarding pattern day trading. You can implement an active investing strategy in a Roth IRA, but it’s likely not worth trying.

Instead, your Roth IRA is a great place to use a long-term passive investing strategy. You can consider using more active strategies in your taxable margin account as part of your overall portfolio and investing plan.

Frequently Asked Questions (FAQs)

How profitable is day trading?

Day trading can be highly profitable, but it’s also highly risky. The use of margin places day traders at risk of losing more money than they have invested. This is especially risky in the context of retirement savings because you’re limited in the amount you can contribute to a Roth IRA each year, and wiping out your nest egg can make it hard to fund your retirement.

How can I make my Roth IRA grow faster?

One of the best ways to make your Roth IRA grow faster is to max out your annual contributions to the account. You can also consider investing in securities that are higher risk or more volatile but that offer higher potential returns.

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Article Sources

  1. Securities and Exchange Commission. “Margin Rules for Day Trading.”

  2. IRS. “Retirement Topics - IRA Contribution Limits.”

  3. Fidelity. “Limited Margin Trading Within an IRA.”

  4. Index Fund Advisors. “SPIVA: 2021 Year-End Active vs. Passive Scorecard.”