Trading Stocks in a IRA

Trading Stocks in a IRA

Individual Stocks - Equities in an Retirement Account

Trading Stocks in a IRA - Few retirement plans discuss these; many people instead opt to stick to mutual funds. But many believe stocks deserve a place in the active investor's portfolio.

If you're buying stocks within a tax-deferred retirement account and also with some of your everyday funds, the question is which type of stocks go into which account. The answer is: Stocks paying high dividends go into the retirement account, since those dividends would otherwise be taxed immediately at the regular income-tax rate and thus lose the benefit of compounding tax free.

Small cap stocks and other aggressive growth stocks should largely be left to your everyday account for two reasons. One is that they don't tend to pay big dividends anyway, so the only major tax hit on them comes when you sell them. Which brings us to point two: Profits from stocks sold in an everyday account are taxed at the generally lower capital-gains rates, while everything that is taken out of a traditional retirement account is taxed at the generally higher regular income-tax rate. (The only exception is a withdrawal from the new Roth IRAs created by the 1997 budget agreement. Contributions are taxed, but withdrawals are tax-free.)

It is the overall opinion big-dividend stocks like Walmart or Bell Atlantic or General Motors should be overallocated to your retirement account, while small-cap and other aggressive-growth stocks should be overweighted in your everyday account. This is particularly true as you get to within 10 years of retirement and throughout your retired years, as the risks of highly volatile small stocks come to outweigh their potential gains.

Also remember that no matter how many years you have until retirement, this is the money you intend to live on, so diversification among industry groups is even more important here.

This information is strictly for guidelines. You should check with your Financial Advisor or Accountant for more information, which would suit your individual needs and temperment. Also you can check the links on this page for information.

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