The Taxes on Stock Trading in an IRA Account

by Tim Plaehn

There are pros and cons for trading stocks in an individual retirement account (IRA) when it comes to tax issues. Some issues are related to IRA restrictions and others are due to the tax treatment of IRA money. The type of stock trading the IRA owner plans to do also has an effect on the tax consequences. A trader should weigh the benefits of trading in an IRA before doing so.

Tax Deferral

A main reason for the existence of IRAs is to allow retirement funds to grow tax deferred until retirement. Tax deferral helps an account grow larger and faster, since the money to pay taxes does not need to be withdrawn from the account. Setting up a brokerage IRA account and using the account for stock trading is a valid way to grow the value of an investor's IRA balance. The gains made in the account from trading will be tax deferred until withdrawals are made during retirement.

IRA Trading Restrictions

As a tax-advantaged account, IRA rules restrict or eliminate some of the tools and tactics used by stock market traders. Stock trading is often accomplished in a margin brokerage account, however IRAs can't be margin accounts, only cash accounts. With a cash account a trader can't borrow money through a margin loan to boost trading returns. Additionally, in a cash account a trader must be careful about buying stock and selling the shares within the three-day stock settlement period. Short selling stocks is not allowed in cash accounts and therefore not allowed in IRAs.

No Tax Losses

Profits and losses from trading in an IRA are not taken on the trader's regular income tax return. The ability to defer gains is a good thing, but the loss of the ability to write off trading losses is a negative. A trader could experience a run of bad trades and lose a significant portion of his IRA account value. In a non-IRA account those losses could be used as tax deductions. However, losses from trading in an IRA can never be used as tax deductions.

Full Time Trader

A full-time securities trader can claim trader tax status to reduce income taxes. Trader status is designated for individuals earning a significant portion of their annual income from trading. Using retirement plan money such as IRA funds as trading capital will result in the IRS denying a trader status claim. Stock trading in an IRA should be limited to trading in the IRA just to grow the IRA value, not trading the IRA as a full-time occupation.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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