Can You Actually Day Trade in a Roth IRA?

SmartAsset: Can You Day Trade in a Roth IRA?
SmartAsset: Can You Day Trade in a Roth IRA?

Day trading is a type of active investment. And while you can day trade in your Roth IRA, active investments are relatively uncommon in retirement accounts. Roth IRAs are intended to be stable, long-term portfolios and the IRS tries to discourage speculation. Portfolio rules generally don’t let you make aggressive moves like margin and leveraged trading, which limits strategies like day trading. But you can still actively manage your account within limits. Here’s how it works.

A financial advisor could help you put a retirement plan together for your goals and needs.

What Is Day Trading?

Day trading is a form of high-speed, extremely volatile investing. Most professionals don’t consider it investment at all, but rather a very specific form of trading.

A day trader opens and closes all of their positions within the same trading day, holding nothing overnight. While this can mean holding a position open for several hours, most day traders operate much more quickly than this. They tend to sell their positions within an hour or even a few minutes of opening it.

Day traders capitalize on market movement and, above all else, volatility. Their goal is to predict short-term fluctuations in the stock market and turn around fast profits on that basis. In most, if not all, cases a day trader works on very small margins. Any given trade will net them only a small profit, sometimes less than a dollar per share. A successful day trader makes up for these small margins with volume, making a large number of trades that add up to a significant profit.

Since day traders move on very small differences, their transactions tend to be very large as well as very frequent. As a result, they engage in what’s called “margin trading.” This means that they borrow money to make larger and more frequent purchases than they otherwise could, with the loan secured by the value of their account. This lets them move very quickly, buying new assets before the cash from their last sale has returned into their account, and it lets them move in large volumes. However, as with any kind of debt-based investing, margin trading is very risky. An unsuccessful trader can find themselves underwater, owing more money than they have.

Can You Day Trade in a Roth IRA?

SmartAsset: Can You Day Trade in a Roth IRA?
SmartAsset: Can You Day Trade in a Roth IRA?

Nothing in the rules of a standard Roth IRA prevents you from buying and selling stocks in the same day. So in that limited sense, you can conduct day trades in a Roth IRA.

However the IRS bans many forms of speculative and high-risk trading in retirement accounts. Among these rules, you’re not allowed to conduct any form of margin trades. This makes it difficult, if not impossible, to conduct active day trading in a Roth IRA for two reasons:

  • First, from a practical standpoint, margin trading is often necessary for day trading. Without access to a margin account you often can’t move assets quickly enough to effectively make day trades. You have to wait for the cash to clear each transaction, which can often take hours if not overnight depending on when you make your trade. You also have to limit your trades to cash on hand, which may not give you enough capital to make worthwhile money off each trade.

  • Second, any investor who makes a minimum number of day trades is considered a “pattern day trader.” At time of writing this was defined as someone who makes four or more intra-day trades within a five business day period.

Pattern day traders are subject to additional requirements. Most importantly, they must keep a minimum liquidity in their account. At time of writing the Financial Industry Regulatory Authority required that pattern day traders hold at least $25,000 in any related account. This is difficult in a Roth IRA, which has contribution limits and should virtually always hold mostly investment assets rather than cash.

Without access to margin trading, and with often-unrealistic capital restrictions, Roth IRAs are very rarely a good option for day trading. In fact, SmartAsset is not aware of any circumstances that make day trading in your Roth IRA a wise approach. The rules aggressively discourage trying to day trade in this account, and the nature of a Roth IRA emphasizes long-term, passive investing. This is generally a good idea anyway, since long-term and passive investors almost always make more money than active investors, with most studies finding that between 95% and 98% of actively managed accounts underperform the S&P 500.

Bottom Line

SmartAsset: Can You Day Trade in a Roth IRA?
SmartAsset: Can You Day Trade in a Roth IRA?

While you can make intra-day trades with your Roth IRA, rules set by the IRS and FINRA generally make it difficult if not impossible to do significant day trading in this account. Investors should note that when it comes to retirement planning, day trading carries more risk. Active investors tend lose more money when compared with passive investors. And while the returns could be higher, when you get closer to retirement age, financial advisors generally recommend lowering your investment risks.

Tips for Retirement Investing

  • Financial advisors can guide you in picking the best assets for your portfolio. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • If you want to compare active investing like day trading with other types of investments, this SmartAsset guide compares active vs. passive investing.

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