Roth IRAs can store almost any financial asset, except for life insurance and collectibles. However, “large” IRA companies (e.g., may charge some additional fees if they trade certain types of investments, such as a Self Directed Gold IRA). For example, while brokers won't charge you if you trade stocks and most short-term ETFs, many mutual fund companies will charge you an early repayment fee if you sell the fund. This fee usually only applies if you've owned the fund for less than 30 days. So, you can actively trade in a Roth IRA, but should you? Research consistently shows that passive investing outperforms active investing, whether you are an individual investor or a professional.
Instead, you can defeat most professionals by maintaining a passive approach and you'll reap the benefits of the market. One approach is to buy a fund based on the S&P 500 index, a collection of hundreds of the largest publicly traded companies. The index has yielded an annual return of around 10 percent for extended periods, but you'll have to maintain the fund over time to enjoy its benefits. If you operate in a taxable brokerage account, you will receive a tax waiver if you make a losing investment.
Some investors even ensure that they get the highest possible amortization through a process called collecting tax losses. They get that benefit and even buy back the stock or fund later (after 30 days) if they think it's about to rise in the future. Index funds invest passively, which means that they track a target index, such as the S&P 500, the Russell 2000, the Dow Jones Industrial Average, the Nasdaq Composite, or something else. These funds don't make active trading decisions and simply hold whatever the index holds.
Day trading is a type of active investment. And while you can make daily transactions with your Roth IRA, active investments are relatively rare in retirement accounts. Roth IRAs are intended to be stable long-term portfolios, and the IRS tries to discourage speculation. In general, portfolio rules do not allow aggressive movements, such as margin and leverage trading, which limits strategies such as day trading.
However, you can continue to actively manage your account within the limits. Depending on your retirement plans, you can have all of the investments in a Roth IRA listed above, as long as the Roth IRA holder offers them. The tax benefits of a Roth IRA may make it tempting to actively negotiate investments within an account for tax-free benefits, but actively trading with funds from a Roth IRA comes with several drawbacks. Since a Roth IRA offers tax-free growth, you can freely trade investments within a Roth IRA without incurring the capital gains taxes that normally apply to investment gains.
Unlike contributions to the 401 (k) plan and the traditional IRA, contributions to the Roth IRA are made with after-tax income. So, whether you already have a Roth IRA or are considering the option, it's wise to know the rules, regulations, and restrictions of investing in a Roth IRA. 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, certificates of deposit, mutual funds, mixed-asset funds, and alternatives to cash.
