How to Trade Your IRA and Grow Your Retirement Nest Egg
It’s like your attic. For the most part you forget it’s up there and you generally ignore it.
But, one day you go up to have a look around and you think “I could do some really cool things with all the great stuff up here. I should come up here more often.”
And then you don’t.
That quote was made about Canada, but could just have easily been made about most people’s IRA accounts.
Even the most active traders tend to ignore their IRA. Very few have a systematic method for growing their nest egg. Yet what could be more important than enabling a comfortable retirement?
Do You Actively Manage Your IRA?
You can trade equities in either a traditional or Roth IRA. And there are some very good reasons why you should consider doing so.
- 1. Tax Deferred Gains
- In a normal trading account (not an IRA) your gains from short term trading are taxed at the ordinary income tax rate. However, in an IRA account all gains are tax deferred.
- 2. Tax Reporting Requirements are Reduced or Eliminated
- Your gains and losses in a tax-deferred retirement account such as an IRA are not reportable. This eliminates the burden of maintaining records of buys and sells.
- 3. Passively Managed IRAs Have Under-Performed
- The common advice is that buying and holding a diversified portfolio of passively managed index mutual funds or ETFs is the way to “manage” your IRA. But, most of these portfolios of index funds lost between -35% and -50% in 2008 and have failed to keep pace with inflation over the past 12 years.
A much better solution is to actively manage your IRA using a systematic approach and backtested strategies.
Challenges to Trading Your IRA
To successfully actively manage or trade your IRA account you first need to understand some of the restrictions that apply to retirement accounts. Some of the most significant restrictions in trading your IRA account are:
- 1) You cannot use margin – only cash accounts are permitted
- 2) You cannot sell short
- 3) After you sell a security you do not have access to the funds from that sale for a 3-day settlement period
The third restriction is the most difficult for active traders. This restriction effectively eliminates day trading strategies from consideration.
Swing trading strategies can also be problematic in an IRA. Swing trading strategies that hold 3-7 days rely on being able to allocate capital when high probability opportunities arise. If your funds are locked up in a 3-day settlement when you get your trade signals, your actual trading performance could significantly under-perform the expected results.
Another challenge that traders have with actively managing their IRA is time. If you are trading a margin account full time, or if you have a full time job, it can be difficult to find enough time to actively trade your IRA.
The Perfect Trading Strategies for an IRA
Despite the challenges to actively trading your IRA, the benefits of growing your retirement tax deferred are too significant to ignore. And each of the challenges outlined above can be overcome by selecting the proper systematic trading strategies.
The perfect trading strategy for an IRA would have the following characteristics:
- 1) The strategy should hold positions for one month or more on average. This minimizes the possibility of the 3-day settlement period keeping you from entering key trades. To maximize the growth potential of your IRA, hold periods of 1 to 3 months are optimal.
- 2) The strategy should have a high percentage of winners and a high average profit per trade. While the tax deferred status of IRA accounts allows gains to grow without being taxed, it also means that losses cannot be deducted. Your strategy should ideally have a win percentage of 70% or more.
- 3) Your IRA strategy should trade highly liquid stocks or ETFs.
- 4) Your IRA should not consume too much of your valuable time. Ideally, you should be able to prepare your trades on the weekend at your leisure and not have to follow the portfolio during the week.
- 5) Diversification is important. Ideally you should either trade multiple strategies or trade one strategy that is applied to different asset classes such as domestic equities, international equities, commodities, and/or bonds.
Do you have strategies for actively managing and trading your IRA that meet all of these requirements?
To learn more about how to trade your IRA, I’d like to invite you to attend a free webinar on the new, first ever IRA Trading Strategy Seminar from TradingMarkets.com.Register today for the webinar by clicking here.